Many small and medium-size enterprises that reach a relative saturation point in their domestic market look toward the global stage as a way to grow into a multinational corporation. This is known as internationalization, the process of increasing business involvement in international operations. Internationalization requires considerable resources and coordination, and it is fraught with business risks.
A quote from Sun Tzu in "The Art of War": "Unless you know the mountains and the forests, the defiles [narrow gorges] and impasses, the lay of the marshes and swamps, you cannot maneuver with an armed force. Unless you use local guides, you cannot get the advantages of the land."
This past summer, my students and I completed a course in Singapore. We had the opportunity of talking about internationalization with BDO Singapore, a prominent global accounting and consulting firm. In addition to reporting, audits and tax, internationalization is increasingly becoming an important service that accounting firms can provide to their clients. BDO suggests that internationalization involves three important steps to assist clients.
Step 1 involves an assessment of the firm's resources and capabilities in relation to an assessment of the foreign markets using an International Readiness Index. BDO's IRI measures a firm's readiness to expand internationally by scoring the firm's strategy, foreign market knowledge and resources. Often, a firm's market knowledge is gauged through detailed research and a low-risk, low-cost approach that involves a small foreign market exposure through infrequent exports. This macro assessment of the foreign market should include an understanding of the impact of the market's economic health and legal and political environment on the firm's likelihood of succeeding. At the firm level, resource availability, consumer preferences and competition must be researched to see whether they support a firm's international moves.
Step 2 requires a risk analysis of the internationalization initiative. The strategic ranking index can help a firm understand how well its strategies fit with internationalization by quantifying the credibility and financial returns from making the move. Psychic distance is a measure that evaluates the relativities of language barriers, cultural barriers, economic situations and political and legal atmospheres. Management accountants and business analysts are engaged in developing a profit plan that forecasts the expected results of internationalization using projected income statements, balance sheets and cash-flow statements. The profit plan demonstrates how the internationalization initiative is expected to create value from a given set of resources and highlights whether additional investment is required.
Step 3 requires the firm to evaluate its options for entering the international market. There are many modes of entry, and each has an associated cost, benefit and risk. Exporting is one of the most inexpensive ways of entering a foreign market. It can involve overcoming barriers such as trade restrictions, product distribution and a loss of control on pricing or marketing.
To overcome some of these issues, domestic firms may subcontract a foreign firm to perform one or more of the business processes. More adventurous firms may start a new venture in a foreign country by constructing facilities from the ground up. Others may acquire a competitor, supplier or distributor to gain entry into the foreign market. If the capital requirements are too much, firms can consider a joint venture, licensing agreement or franchising agreement as a mode of entry.