Companies and countries trade


Why do people, companies and countries trade?

The answer is simple- because no one can produce everything. People, communities, companies,  and countries aren't capable of producing everything. Nature does not allocate equal resources to all. They produce that, for what they are best suited, leading to specialization. Specialization means concentrating on one or a few products and leaving the remaining products to others. Multinational firms are those which typically own 50% or more of any other company operating in a foreign country. Big names like Nike, Boeing, General Motors fall into this category. Multinational firms needless to say are relatively large, have immense competitive as well as bargaining power in small-developing countries. Countries compete fiercely to attract them only because of what they have on their menu, scarce technologies, skills and financial resources, ability to grab new opportunities & work towards it and being bound by international standards.Firm level data like sales/number of employees are used to explain best the activities of multinationals. Although these data are not widely available so researchers rely on foreign direct investment (FDI). Its basically the investment in a foreign company where the investor owns at least 10% of the ordinary shares.

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Competitive Environment is the main cause for businesses to run into international selling. It creates situations for the business where the competitors being large vendors (offering at lower prices) continues to grow and offer economies of scale. So likewise if the business doesn't grow and expand it will lose its customers.( page no. 15 Richardson International business management)

Companies turn to being multinational either in a proactive manner where in, they anticipate the future evolvement of the markets and plan accordingly or in a reactive manner which entirely depends on what the competitor is planning or doing and where they receive the information first and then act on it.

The 'market' is one of the few reactive reasons why firms go international. Firms anticipate the demand or gain knowledge about a potential demand in another geographic location through their available sources or through an informant. E.g. Honda anticipated demand in the U.S and set up its operations in Ohio, its supplies followed it, but what it dint know was that there were some other Japanese suppliers already present meeting the demands of that market.

The 'political environment' is a major aspect causing firms go multinational. Countries/ Governments usually charge a tariff on exports made into the country but, when the general tariffs are converted to tariff barriers by the same government for other exporters that's when the companies consider setting up a manufacturing operation in that geographic location to evade from the tax barriers. It doesn't end here, the exporting companies may learn that their exports are hampered for certain reasons, i.e 'buy-local' .It means that the exporters are required to set-up a local alliance or relationship to liberate their exports.

Shifts in environmental regulations or changes in work/safety regulations keep recurring. Many a times it acts as one of the reasons for firms to go overseas or a less restrictive location. e.g. there are a few asian companies selling in the U.S market which have moved their manufacturing and assembly options to a place which is less polluted and has less labour regulations like mexico.

Economic reasons mainly costs play a major part for companies to go multinational. When the costs  of production, processing, distributing etc. increases firms always think to invest in newer places with cheaper costs. Any company of the world prefers India or China only because of the skilled cheap labour available and lower costs of production. The whole deal about it being a economic constraint is that lower costs are equivalent to greater profit.

Something is too common these days called 'change occurrence' .This is nothing but a company taking its decision to go international on the basis of a good vacation by the CEO or on the suggestion made by a friend about an opportunity at that particular location. It is hard to believe that GM's or CEO's can take such decisions so easily, although true. e.g. A few years back my father had advised his friend (in the salt business) about the profits involved in manufacturing salt in Sri-Lanka( South Asia). Today, he's one of the biggest salt exporters India, Middle East and Far East.  

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'Proactive' simply means to anticipate the future and plan for it, act in advance. Proactive companies are competitively better positioned than reactive companies.

The most important reasons would be costs, where in the costs are the low labour, production & energy costs followed by less stringent rules and regulations effecting labour and pollution.

Proactive are always those who approach first, so they launch an offensive play on the new market before anyone possible. e.g. Just how Pepsi entered the Indian market in July 1986, Coca-cola followed in 1990. In certain situations companies also enjoy tax evasions up to a certain limit for few investments.

Once the idea of why to do the specific task is formulated, the next step automatically is how to generate a strategy to achieve those results. In our context, how firms go multinational?

The most common way of entering international business is through mere imports & exports. A firm showing interests in a specific firm in a specific country or in a country itself, due to the availability of cheaper resources, and so that its ideas and technology can also be put into good practice. In this manner the firm is putting itself in front of the international market and making a huge commitment. Exports can also be of two different types, direct exports or piggy-back exports.

Piggy back exports are also known as entreport trade where exports are based on previous imports and processing and manufacturing of the raw materials exported is carried on. Before one enters the foreign market, one must know about the foreign products and environment. Somalia has no government now, there's complete anarchy. To who to export and from whom to take the money is not clear. There are Export Management Houses (EMH) these days to help with the firms where to enter international business and how to enter.