There are various reason of entering domestic firm to international market. Important reason for going international market is given below –
- DOMESTIC MARKET CONSTRAINTS: Domestic market constraints drive many companies to expand the market beyond their national boundaries. Following are the main constraints in the domestic market :
- If the size of domestic market is very small, companies look forward to foreign markets to achieve economies of scale.
- Due to recession in the domestic market, companies may not able to utilise the full production capacity, then the company focus on export markets.
- The markets for a number of products tend to decline in advanced countries. This often happens when the market potential has been fully tapped, and when the population in some of the advanced economies would decline.For example, the fall in birth rate imply contraction of market for several baby products. To overcome such problems in the domestic market, companies then look for foreign markets.
- Growth in international markets causes the growth in demand for some products, attracting the domestic manufacturers of these products to internationalise the product in international market.
- Sometimes, excess production capacity arises because of changing demand in the domestic market. As domestic markets switch to new and substitute products, companies making older products versions develop excess capacity and look for overseas market opportunities.
- GOVERNMENT POLICIES AND REGULATIONS: Government policies and regulations also motivate the firm to internationalise. For examples :
- Government may impose certain restrictions on further growth and the capacity expansion of some firms within the domestic market in order to achieve certain social objectives. But there may not be any such restrictions on making investment overseas.
- Many governments give a number of incentives and other positive support to domestic companies to export and to invest in foreign countries.
- GROWTH OF OVERSEAS MARKETS: The enormous growth potential of many foreign markets is a very strong attraction for companies to enter into foreign markets. In a number of developing countries, both the population and the income are growing fast. And if the market for several goods in these countries is not very substantial at present, then it become opportunities for foreign companies to establish foothold there, and earn profit.
- INCREASED PRODUCTIVITY: Increased productivity is necessary for growth and survival of firm. Because in these days of technological developments, bigger companies have to spend a lot on research and development, larger market become necessary to bear all these expenses and so export also become necessity.
- RELATIVE PROFITABILITY: One of the most important objectives of the internationalisation is the profit advantage. International business could be more profitable than the domestic market. The price realised in the export market is higher than that realised in the domestic market. And many international firm establish their production facilities in the countries where manufacturing cost (labour, power, Raw material) is lower in order to earn more profit and expand their business.
- DIVERSIFICATION TO REDUCE BUSINESS RISKS: A diversified export business may help in mitigating sharp fluctuation in the overall activity of a firm. A sharp fluctuation may take place due to recession and seasonal factors such as climate. So when firm is selling in number of markets, the downward fluctuation in sales in one market may be fully or partially counterbalanced by a rise in sale in other markets. Then there would be minimum chances of loss which may occur in that situation.
- CONTROL INFLATION AND PRICE RISE: On several occasions, Government permit imports to increase the supply and control prices, and thus control inflationary pressures on the economy. Whenever domestic prices increase, imports are allowed to increase the supply and control the prices. When imported products are available at lower price, domestic producer also reduce their prices. Without imports, there is no pressure on domestic producer to reduce their prices. The lack of imported product alternatives forces consumers to pay more, resulting in inflation and excessive profit for local firms.
- COUNTER COMPETITION: The strategy of counter competition is to penetrate the home market of the potential foreign competitor so as to diminish its competitive strength and to protect domestic market share from foreign penetration.
- STRATEGIC VISION: The systematic and growing internationalisation of many companies is essential part of business policy or strategic management.