What is Global expansion?
Research Proposal: Why Do Most Businesses Fail to Expand Internationally?
Introduction and Background Information
In the recent past, economic globalization has grown at a very high rate. The growth means that there are many opportunities for businesses in the global arena (Shenkar, Luo, and Chi, 2015, p.6). However, there are barriers that are deterrent to internationalization of business entities. While it is not all businesses that are unable to venture in international market, it is quite important to note that most entities often face difficulties in their endeavor to expand their reach across their territorial borders (Shenkar et al., 2015, p. 16). The world of business is characterized by stiff competition and thus, organizations should keep abreast of the emerging issues to remain competitive. Internationalization is one of the emerging trends in the business environment as stakeholders have discovered the need for extending business operations beyond domicile country.
Research has shown that many companies that have gone global are likely to generate much revenue in foreign countries compared to their home countries. For instance, Nokia, Honda and Toyota, have made more profits in their foreign operations than the revenues generated domestically (Shenkar et al., 2015, p. 11). Advantages of expanding the operations of a business globally are not just embedded on revenues, there are other benefits that are connected to foreign trade which include: cheaper resources, labor that is competitively priced, and vast market opportunities (Yoder, Visich, and Rustambekov, 2016, p. 236).
In most cases, businesses have strategically shifted their facilities of production to developing economies where it easier to acquire the benefits. In the same vein, expanding globally can also be disastrous to a majority of businesses especially when it is not adequately planned (Henry, 2014, p. 3875). Additionally, firms may face unforeseen circumstances such as foreign policies that interfere with the ease of doing business. These are one of the challenges that force entities to fail in their quest for international expansion. This research will focus on addressing the reason for failure in international expansion.
This research proposal aims at addressing the underlying reasons why most businesses fail to go international and obtain findings that can be used to push for formulation of policies that enable global expansion of businesses.
- To review recent literature for the purpose of exploring and discussing various reasons why most companies fail to expand globally.
- To examine the whether there are factors that are within the powers of an individual business.
- To determine the major factors that are deterrent to global expansion and are beyond the powers of an individual business to highlight the necessity for global reforms on ease of doing business internationally.
For definition of terms, Internationalization means expanding to foreign markets. Firms/businesses/organizations/corporations/companies have been used interchangeably to refer to entities. Additionally, global expansion/international expansion means cross-border investing/trading.
Expansion of business to foreign countries is associated with a positive outcome on an organization’s performance. Literature on global and international strategies posit that firms can enjoy greater economies of scale and cost efficiencies as a result of greater business volume (Nur & Can, 2009, p.108). Many businesses aspiring for global expansion have faced many challenges which have forced them to shed their ambitions. The challenges are mainly brought by trade barriers that are present in the host countries. While all businesses are exposed to similar challenges, it is important to note that small and medium enterprises (SMEs) faces more setbacks than larger firms. Although SMEs are considered to be risk-averse compared to larger corporations, the need for growth has forced to pursue cross-border opportunities (Lanos, 2014, p. 11). However, trade barriers in foreign markets have caused many businesses to maintain their operations in their home countries.
Corruption is one of the main barriers to global expansion. Firms have faced numerous instances where they are required top officials in the host countries to get a nod for their operations. According to research, corruption affects licensing decisions and customs practices thus undermining the tenets of the system of international trading (Borchert, Gootiiz, and Mattoo, 2012, p. 18). When the amount charged by the corrupt officials is added to other expenses required to establish an enterprise on foreign soil, it becomes costly for most companies especially SMEs. Furthermore, some firms such as those from the United States have been prohibited from engaging in corrupt dealings (Molyneux, 2013, p. 5). As a result, the firms cannot expand their operations to countries where bribe is needed to gain access to foreign trade.
There is an emerging trend in some countries where localization barriers are imposed to favor or protect domestic industries at the expense of foreign-owned businesses. According to a 2010 report by National Trade Estimate (NTE) of the United States, these measures are deterrent to a healthy competition between foreign and domestic firms as they lead to unreasonable differentiation of foreign and domestic products, intellectual property, suppliers, or services (Lanos, 2014, p. 17). Many firms are usually unable to withstand the frustration of such measures because they negatively affect the smooth running of business processes and profitability. In that way, internationalization becomes untenable causing most companies to reconsider their decision of extending their activities across their territorial borders.
SMEs face an array of constraints while in global expansion. In essence, SMEs do not have the financial power to conduct global scanning which causes them to lack the managerial expertise to capitalize on international opportunities (Shenkar et al., 2015, p. 141). Economists argue that SMEs faces management time constraints and, in that respect, they opt for short-cuts in information gathering and decision making (Nur & Can, 2009, p.108). The short-cuts are detrimental especially when the firms are deliberating in establishing foreign entities. Moreover, international expansion means that the SMEs should invest heavily on communication and coordination among various units in different parts of the globe, which is expensive. Time and financial constraints are a hindrance to internationalization.
Many businesses suffer resource and scale drawbacks compared to their international rivals. The drawbacks have an adverse effect on the probability of achieving success in the international arena (Molyneux, 2013, p. 18). Unlike large companies, SMEs may easily succumb to competition due to inadequate administrative capacity and inferior products leading to the inability to seize business opportunities. In addition, any initiative that is geared towards global expansion usually consumes a bigger proportion compared to a big firm (Nur & Can, 2009, p.109). In case of failure, SMEs suffer a great loss thus increasing the level of risk of investing abroad.
Language is an essential yet ignored factor in international business. Piekkari, Welch and Welch (2015) argue that, even with the current enhancement of technology, many businesses rely on face to face interaction or social exchange which is hard to maintain through hiring the services of professional translators or automated translation (p. 1). Reports indicate that the efficiency of trade between two countries that share a common language is 42% greater than in countries that do not share a language (Piekkari et al., p.1).
Language plays a pivotal role in global trade as it facilitates global expansion. Firms that are in their first stages of internationalization faces much difficulty trying to gather information about foreign market in a country that uses a completely different language. Also, promotional activities become costly to firms aiming to enter foreign markets that are characterized by differences in language. For instance, there are minimal chances of success for companies from non-English-speaking countries entering in English-speaking countries (Piekkari et al., p.20). As a result, language barrier is deterrent to international expansion.
Economic and political uncertainty in foreign market discourages international expansion to a larger extent. In research that was conducted by Al-Hyari, Al-Wesha, and Alnsour (2011), firms that believe that a foreign market may be faced with economic and political uncertainties are usually hesitant to venture in such markets (p.202). They researched on Jordan’s trade relations with Iraq and how the Iraq war affected Jordanian foreign businesses in the country. Iraq was the biggest importer of products from Jordan before the outbreak of the war. Additionally, there were many Jordanian firms in Iraq that had employed many Jordanians. The investigators found that the war led to the closure of many Jordanian businesses that had been established in Iraq. SMEs were the most affected and it is reported that many of the firms have since been adamant to venture in countries where there is perceived economic and political uncertainty.
Lack of a strategic location hinders global expansion. Different consumers have different location preferences. In his research on factors that led to the failure of America’s Wal-Mart in South Korean market, Kim (2008) found that location was one of the major factors (347). It is argued that South Korean consumers prefer to shop more frequently because they buy goods in small quantities compared to American who tend to shop less frequently because they purchase goods in large quantities using their cars. Thus, location is not an issue in America as it is in South Korea.
It is reported that when Wal-Mart entered South Korean market, it opted for distant locations where land would be cheaper. Also, Wal-Mart expected that consumers in South Korea would drive to the distant locations but their expectations were not met. On the other hand, local rivals had strategically located their stores closer to consumers thereby enabling them to attract huge customer traffic (Kim, 2008, p. 350). As a result, location had a significant impact on the competitive position of Wal-Mart. Lack of a strategic location to set up a business in foreign market has caused many firms to turn away from investing across their territorial borders.
Inadequate protection of rights to intellectual properties make firms to fear expanding globally. This problem is usually faced by SMEs that operate in foreign markets. According to a report, U.S SMEs find difficulties operating in the European Union because their trade secrets and patents are not adequately protected (Lanos, 2014, 27). The SMEs complained of higher costs needed for protection of patents and trade secrets. When entering a foreign market, it is the goal of every firm to minimize costs as much as possible. It an entity finds that such costs are unreasonably high, then it avoids cross-border trading.
Transnational cartels have had a devastating impact on international expansion of most business enterprises. Studies have shown that the cartels have the power to deny newcomers entry to the market. The power of cartels was discovered in the years between 1916-1934 (Schröter, 2012, p. 149). Scandinavian countries, despite being small, were able to dominate the forestry industry after forming cartels on pulp, paper, and timber. The countries became so powerful that they barred the Soviet Union from joining the export markets of forestry products. Transnational cartels go to the extent of controlling every aspect of the market including pricing. Thus, companies willing to joining cartel-dominated markets inn the global arena may fear to take risk of harassment and mistreatment by the cartels.
From the literature reviewed, it is evident that there are many reasons that have caused numerous companies to fail in their endeavors to establish international branches. However, there lacks enough case studies on multinational companies that have failed as compared to case studies on successful international companies. Additionally, there is no literature that has put particular emphasis on major factors that discourage global expansion. The main reason for stressing on the major factors is that some challenges are within the powers of an entity and they can be solved using alternative means by the respective businesses. This research will focus on the main reasons that bar businesses from expanding globally and are beyond the jurisdiction of a business that is aspiring to expand globally.
This research shall be a qualitative research. The reason for using this type of research is that it is ideal for investigating a social phenomenon to get an understanding of people’s behavior and the factors that guide such behaviors. Particularly, it focuses on “why” instead of “how” of a specific phenomenon (Rovai, Baker, and Ponton, 2014, p. 15).
Furthermore, a qualitative researcher focuses on the process and not the outcome or products. In the case of this research, more focus is put on investigating on why businesses fail to venture abroad rather. In a nutshell, the study seeks to understand what leads to failure. Since qualitative research focuses on the process, it is often descriptive as the researcher is concerned with understanding and meaning obtained through pictures or words (Silverman, 2016, p. 7). Among the assumptions of qualitative research is that reality is a social construction and variables are interwoven, difficult, and complex to quantify. Thus, the researcher must be present during the collection of data and its analysis.
The methods of data collection for the study shall be structured interviews and official reports. Interviews shall represent primary sources while official reports shall represent secondary data. The importance interviewing is that they it is a credible source for first-hand information (Rova et al, 2014, p. 22). In the same vein, the interviews shall be tape-recorded to ensure that conversations are accurately kept for future retrieval, Also, tape-recording will ensure that no data is lost as notes cannot capture everything (Noor, 2008, p. 1604).
Moreover, official reports are essential reports as they offer reliable data that is based on research and that shall enhance the credibility of secondary data. The frequency of data obtained shall be listed in order of merit in order to determine the major factors that undermine global expansion. Data shall be analyzed through content analysis after which coding will be done using SPSS (statistical software for social sciences).
Official reports shall be accessed from the official websites of the relevant bodies. The reason for preferring data from the websites is that it is cost-effective. For interviews, a letter of request shall be sent to the selected firms. The letter shall entail shall entail information pertaining the purpose, duration, and scope of the interview, its designated place and time as well as the specific person expected to be interviewed. The letter shall also explain the benefits that the selected firm will obtain from the interview.
Participants shall be recruited from 5 industries which include: service, health, manufacturing, fast-food, and banking. The study sample will comprise of regional managers from the industries because they receive communication from the top management and thus, they are involved during business expansion. The study population will involve 4 regional managers from each industry which means that the total study sample will be 20. The reason for arriving at this number is because it is cheaper for the study.
Research ethics shall be upheld to ensure accuracy of data collection, analyses, and conclusion. The recruitment of the participants will be based on informed consent (Silverman, 2016, p. 42). They shall be given prior information about the research before the agree to participate. Besides, participation will be voluntary and the participant’s confidentiality shall be protected at all costs. Moreover, this research proposal shall be submitted to the relevant IRBs (Institutional Review Boards) for approval (Rovai et al, 2014, p. 9). IRBs are responsible for ensuring that a research meets the required ethical standards.
The inclusion criteria shall for the selected firms and the study sample shall be as provided below:
- Firms that have been in operation for more than 10 years.
- Firms that have ever attempted to expand globally but failed due to some reasons.
- Regional managers who have been in the position for more than three years.
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Borchert, I., Gootiiz, B. and Mattoo, A., 2012. Policy barriers to international trade in services: evidence from a new database. The World Bank.
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