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Economics <f Austrian Journal of Humanities and Social Sciences 1-2 (2017)
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UDC 339.94 DOI: http://dx.doi.org/10.20534/AJH-17-1.2-137-144
P. H. Ilchuk 1
1 Lviv Polytechnic National University, Lviv, Ukraine
BENEFITS, DISADVANTAGES AND COSTS OF ENTERPRISES INTERNATIONALIZATION
Abstract
Objective: research of additional costs caused by internationalization, classification and rationale of such costs, and formation the mechanism for cost management within the adaptation, standardization and situational approaches to marketing activities in foreign markets.
Methods: generalization, data grouping, deduction, systematization, analysis.
Results: Based on the review of the literature demonstrated that doing business in foreign markets is accompanied by the need to carry additional costs. Developed author's classification costs of enterprises on internationalization into 3 groups: initial (creation costs), costs of forming and operating market position (current) costs. Determined costs, which make within standardization and adaptation of marketing activities in foreign markets.
Scientific novelty: improved the mechanism of cost management enterprises, developed a typology costs of enterprises for internationalization, through which improved information base for decision-making on the internationalization of enterprises.
Practical significance: identified the group of costs and justified certain costs, which made within the internationalization of enterprises, identified the strengths and weaknesses of using standardization and adaptation of marketing activities within the policy control costs. The advantages of applying the situational approach to the formation of marketing activities in foreign markets are substantiated, allowing enterprises to optimize the cost of internationalization. Advantages of entry into foreign markets in the organizing of the value chain are determined so as to make optimal use of the difference between costs and outcomes (effectiveness) using resources in different countries.
Keywords: internationalization, costs, foreign markets, enterprise.
INTRODUCTION
The modern economy based on the principles of free entrepreneurship, one of which is the freedom of choice of volumes and market management. For countries with a market economy, there are no restrictions on doing business only within single regional market-based countries.
Economists actively investigate the influence of forms ofpenetration and presence in foreign markets for enterprises. So, I. Drabik analyses the impact of forms of penetration and presence in foreign markets, the competitiveness of enterprises [1, P. 592]. V. Kokorina considers the impact of forms of penetration and presence in foreign markets on the possibility of further internationalization of enterprises [2, P. 69]. T. Stahl analyses the impact of marketing strategies to penetrate the enterprise market position [3, P. 614], and the impact penetration into foreign markets at risk of enterprises was explored by O. Pasenchenko [4, P. 39].
Economists differently defined and classified forms of enterprise penetration and presence in foreign markets. Today the basic classification of forms of penetration and presence in foreign markets is the classification proposed by F. Root [5, P. 6]. According to this classification, forms ofpenetration and presence are divided into: exports (exports through resellers, direct exports through agents/distributors, direct exports through the establishment of department/branches abroad, etc.), contract (licensing, franchising, management contracts, contracts for production contracts for investment "turnkey", etc.) and investment (joint ventures, direct investments in acquisitions or new businesses "from scratch", etc.).
Choosing a strategy of internationalization, the enterprise must weigh all the advantages and disadvantages of a particular activity and make a comparative analysis of alternative types of economic agents in foreign markets. Y. Persky and P. Novikova [6, P. 39-42] consider only individual benefits achieved by enterprises in terms
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of internationalization. However, such benefits are treated only as a proactive internationalization motives. Depth study of the internationalization of enterprises Y. Persky and P. Novikova did not commit. Du Chunbu has a similar position, considering the possibility of achieving certain advantages internationalization of enterprises solely as internationalization factors, but not directly investigating the benefits of internationalization of enterprises and the impact of their achievements on enterprises [7, P. 58-63]. Y. Shmalenko is exploring development goals of the principles of internationalization. She has developed the group of criteria in formulating goals and objectives classified internationalization, the achievement of which there are also benefits of enterprises internationalization. However, she does not indicate the benefits of internationalization and their impact on the effectiveness of the enterprises in case of their achievement [8].
However, one of the least researched aspects of enterprises internationalization is cost management. Basic research focuses on coverage of transaction cost management. In particular Lee S. K. et al. examine the internationalization of US publicly traded restaurant companies through transaction cost economics [9]. Also, Zhao D. and He X. M. explore factors, which gave preference to foreign markets in order to exploit market imperfections that can provide greater revenues at lower costs [10]. As a kind of internationalization costs, Fisch J. considers information costs [11]. Very important is the study of financial costs which are associated with internationalization and relation between the level of firm international activity and the cost of debt financing [12]. Equally important is studies of sunk costs in firm-specific assets, such as R&D and marketing, are necessary in order to grow and gain market shares [13]. But there is no holistic approach to classification costs for the internationalization of enterprises and also wasn't developed a management mechanism the additional costs of internationalization. It proves the relevance of this research.
RESEARCH RESULTS
Selecting a target market based on the assessment of the attractiveness of certain market segments (global, regional or national level). This assessment can be carried out by using the following criteria:
- profitability (evaluating the expected performance product sales in some segments);
- matches consumer needs and preferences of specific segments of the range of products the company and its strengths;
- competition level (the lower the level of competition, the more attractive is the segment);
- operating costs for separate segments, which include marketing costs (marketing, advertising), the costs of communication with the target consumers (lower cost, the segment is attractive).
Note that doing business in foreign markets is accompanied by the need to carry additional costs. This fact was noted in the studies of S. Hymer already in 1960 [14, P. 34], but further studies began only in the 90's. [15, P. 64-81; 16, P. 229-244; 17, P. 339-350; 18, P. 341-363].
Singles out a number of components such costs — not only economic [14, P. 34], but also social, political and legal. Studies need additional costs for the internationalization of enterprises and its management in the studies of S. Zaheer [18, P. 341-363] called "theory of limits foreign companies". This theory explores the sources of additional costs companies operating in foreign markets, compared with companies that operate only in the domestic market. The prerequisites that determine the supplementary costs of internationalization are: 1) lack of knowledge of the market environment in a foreign country, 2) geographic, cultural, psychological, political, legal and economic differences between the activities of the domestic and foreign markets, 3) discrimination against foreigners, 4) conduct foreign economic activity mainly in the country's domestic market-based, 5) the risk of exchange rate changes [18, P. 343].
The emergence of additional costs for an activity outside the home country linked to three types of costs: initial (creation costs), costs of forming and operating market position (current) costs (Fig. 1).
Initial costs arising as to the beginning activity of the enterprise in foreign markets, and subject to expansion activity into other new foreign markets. Each foreign market, in addition to various levels of globalization and the availability of various types of economic activity, is also characterized by other differences.
This necessitates a thorough collection and analysis of information for the study of its specificity. Otherwise, the lack of knowledge about foreign markets or incorrect interpretation of the collected data can be a cause of wrong management decisions.
The level of initial cost depends on several factors: 1) the level of similarity (closeness) foreign to domestic market, 2) the value of the foreign market and its internal
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configuration, 3) the level of globalization of the sector structure, 5) form of penetration and presence in the (economic activity), 4) development of market infra- foreign market.
Fig. 1. Classification costs of enterprises for internationalization
Source: author proposed
The specific foreign markets can lead to additional costs arising from the need for cooperation with foreign partners, buying foreign assets (companies, local brands) and adaptation of products offered to the local market.
The costs of forming the company's market position relate to the relationship with the subjects of the foreign market: customers, resellers, suppliers and state authorities. Costs the formation of market position on the foreign market are higher if ethnocentric relationship is stronger in this market. Ethnocentric relationship characterized by the presence of market conditions:
1) consumer (consumer groups) prefers products produced by local manufacturers,
2) government creates many obstacles to market access (especially true in the case of imports),
3) the legislation gives priority to local entities,
4) retailers form entry barriers for foreign suppliers.
Costs the formation of the market position of the
company can be significantly reduced if work under the brand name of the foreign market by cooperating with foreign partners, or sign in a foreign market that is most similar in characteristics to the domestic market (or other foreign markets, which already operates the company).
Operating costs for ongoing activities in foreign markets may include transaction costs (fixed operating costs, transactions), the cost of monitoring and coordination. Companies engaged largest operating costs while doing business in foreign markets as exports.
Application of the marketing strategy of internationalization in order to increase activity on the one side reduces operating costs, and the other — increases the value of the initial costs (associated with investing in foreign assets). At the level of operating costs also affect currency fluctuations, as significant currency fluctuations increase the level of risk associated with internal and external operating activities in several geographic markets.
The costs of monitoring and coordination related to the increasing complexity of organizational structure that works in foreign markets. Increasing the number of geographic markets in which the company operates increases those costs. The costs of monitoring and coordination also depend on the level of diversification of geographic markets, a variety of forms of penetration and presence on foreign markets and control relationship between the head office company and its subsidiaries (foreign missions).
Based on the researches [19] it is possible to determine the role of specific approaches to standardization and adaptation of marketing activities in foreign markets. The dominant role belongs to the situational approach (the theoretical basis of 40% of reviewed publications) less important role belongs to the adaptive approach (34%) and least common is standardizing an approach (only 23%).
Marketing activities in foreign markets are characterized by a high level of standardization and provide many benefits to enterprises, including reduction of production costs, the formation of a single image, sharing experiences and information, improving the management of strategic marketing management.
Reducing production costs is the strength ofstandard-ization of marketing activities internationally. Standardization leads to lower production costs due to economies of scale and range of activities, reduction of supply, research and marketing costs. The standardized product provides the ability to carry out large-scale production (in several production units located in different regions or at a production unit in the world), to achieve better positions in the contracts for the supply and reduce the cost of R & D through a limited number of versions of the products (no need to make changes to the product to adapt to local preferences). Unification promotion of measures reduces expenses on production of promotional materials, ensures
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the accumulation ofexperience and reduces the likelihood of errors.
The enterprise can create a single image of the trademark in various countries through high standardization of promotional activities (including through measures of marketing positioning).
Standardization marketing activities promote the transfer of experience and information between employees of different branches/subsidiaries located in different countries. Heads develop optimal marketing activities and seek to implement them in all countries where the enterprise operates. An important task is to create not only the channels of experience and information exchanging but also a motivation system for the exchange of experience and information, procedures for their use. For example, the advantage of global consulting companies is a database that consists of previous researches carried out in different countries. For such enterprises, the initial step is analyzing this database. This information speeds up decision making and allows to choose the best options.
The standardization of marketing activities and presence in many geographic markets involves being the best strategic assumptions: creating competitive advantages, the possibility of taking action in response to attacks from competitors, faster entry into new foreign markets.
However, standardization of marketing activities is accompanied by centralization of decision-making. In this situation, a unit of the company (or more units) becomes the leader (by the criterion of the share sales, product brand (product line)) in the promotion of a particular brand (product line), serving large customers struggle with competitors or research and development. This unit controls and coordinates the analytical work, planning and marketing activities in the markets in which an enterprise operates. It reduces marketing and
other costs (for analysis, planning and monitoring) and facilitating the transfer ofbest practices and information.
The adaptive approach consists in adapting to the specific marketing activities of foreign markets. Adaptation emphasizes the difference between different geographical markets. Consequence take account of changes in different geographic markets is the low level of standardization of marketing activities. The adaptable approach is based on providing basic priority needs of clients and requires adapting marketing activities to the expectations and preferences of consumers, which belonging to the target market in a specific geographic market. The advantages of adaptive approaches are: adapting products to the expectations and preferences of target customers from different countries and decentralized marketing in geographical terms.
The adaptive approach enables enterprises to increase sales volumes through the use of differential pricing in different countries. In addition, greater needs and customer loyalty, so an enterprise can increase revenue from product sales through repeat purchase products and lower marketing costs. Decentralization of marketing activities in geographical terms entails increase results from: 1) lower costs for coordination of marketing activities and internal reporting; 2) increasing the speed of decision-making: branch/subsidiary can quickly adapt to the specific market and the changes taking place in it; 3) limiting the number ofconflicts between the main units and branches in foreign markets; 4) to motivate managers and employees offoreign affiliates (foreign partners), allowing the implementation of a large number of local initiatives; 5) no need for the loss of market position by achieving the global goals of the company.
Strengths and weaknesses of using standardization and adaptation of marketing activities are systematized in the Table 1.
Table 1. - Strengths and weaknesses of standardization/adapting marketing activities
Indexes Standardization Adaptation
Increase profits After achieving economies of scale and range of activities Because of the increase in income from sales due to increased product matches the characteristics and expectations of consumers in local markets and reduce the cost of coordination
Economies of scale and range of activities The ability to achieve both effects Limited opportunities to achieve both effects
The image of the brand/company The ability to create a single image on a global level The ability to create a differentiated image on a global level
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The transfer of experience and information The ability to use best practice in many countries and the transfer of experience and information from one country to another Limited opportunities — because of the high level of independence of foreign affiliates
Strategic opportunities The higher possibility of creating competitive advantages, the possibility of taking action in response to attacks from competitors Limited opportunities due to the high level of independence branches/subsidiaries in different countries
«Proximity to the customer» Limited (excluding global clients) Max — by adapting to the specific target market in the country
Costs for coordination High — because of the high level of coordination of marketing activities (regional and/or global level) Low — because of poor coordination of marketing activities (regional and/or global level)
Speed of management decisions Low — because of the high level of centralization High — because of the low level of centralization
Relations between main offices and branches in foreign markets Many conflicts — because of the introduction of centralized management solutions and marketing programs A small number of conflicts — by providing affiliates or partners of Foreign pop-up waste, significant rights in decision-making and implementation of marketing programs
Source: author systematized
Benefits adaptive approach is both shortcoming standardization approachable.
We recommend using a situational approach based on organizing, marketing activities so as to ensure the highest possible level of standardization and maximum the required level of adaptation. The situational approach to adaptation and standardization of marketing activities in foreign markets based on the following assumptions: 1) There is no complete standardization and adaptation of marketing activities; 2) the decision to standardize or adapting marketing activities determined by external and internal factors; 3) various marketing activities have different levels of standardization; 4) choice of standardization and adaptation of marketing activities should be carried out only based on the impact on financial performance.
It should be noted that standardization and adaptation should not be considered alternatives to the two opposing marketing activities; on the contrary, they should only be seen as two possibilities of action. This means that companies form the marketing mix activities in foreign markets with varying levels of standardization (adaptation), while the absolute Standardization (adaptation) cannot reach. The decision on the level of standardization/adapting depends on the market situation for a certain period.
Developing a common approach to determine the optimal level of standardization of marketing activities in foreign markets are focused mainly on finding answers to questions of marketing tools easier or harder amenable to standardization Basic research into this issue carried M. Theodosiou and L. Leonidou [20, P. 141-171]. Based on these researches, it was determined the level of standardization of various marketing tools at the global level. In particular, it was found that the easiest way to standardize the product, causing: 1) obtain substantial price advantages as a result of economies of achieving economies of scale, characteristic products and scientific research; 2) a short product life cycle; 3) centralized quality control procedures. Among the characteristics of the product with the highest level of standardization can be achieved for quality and performance, while the lowest — for the number of models.
Price and promotion have the similar level ofstandard-ization in foreign markets. Among the characteristics ofthe price element with the highest level of standardization is a margin for end consumers the lowest — margin reseller. It happens because ofthe first element typical mainly for the B2B market where a high level of globalization, while the second element is associated with B2C market, which not only lower the level of globalization but also in different countries vary greatly distribution channels.
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The reluctance of companies to standardize the prices in international markets can be explained by an attempt to maximize profits. Because enterprises try to use any situation in which market conditions (particularly competitive situation) allows the use of higher prices. Only reap the benefits associated with the creation of a single image in foreign markets can be a prerequisite for the standardization of prices.
Eligibility of standardization/adapting is necessary to assess the results of the company in foreign markets. A. Shoham [21, P. 97-120] made a study whose purpose was to determine the relationship between the level of standardization of individual marketing tools and financial performance and customer feedback. The conclusions of this study are:
- high level of product standardization negative impact on financial results (the result was statistically significant);
- a high level of standardization of the product does not affect the subjective impression on consumers (results obtained from the survey respondents, the result was not statistically significant);
- a high level of standardization of prices has a positive effect on financial performance and subjective impression of consumers (the result was not statistically significant);
- a high level of standardization of distribution negative impact on financial performance and subjective impression of consumers (the result was statistically significant);
- a high level of standardization promotes a positive impact on financial performance and adversely affect the subjective impression of consumers (the result was not statistically significant) [21, P. 104-111].
Based on studies of A. Shoham [21] we can conclude that the best results are achieved activities now provided the average level of standardization (adaptation) marketing activities with regard to external and internal factors.
Conclusions
Entering foreign markets, the enterprise automatically reduces dependence on the performance of both the domestic market and on the performance of other foreign markets (provided that the measures previously carried internationalization). This allows the enterprise to provide a stable market position already on the international market.
Also, working in various foreign markets, the company improves its business relations with suppliers, distributors, customers and state authorities, leading to the strengthening of its market position. Entities that have a strong position on the world market are not only opportunities in the choice of suppliers and are able to agree on more favorable terms of cooperation with them. At the same time suppliers willing to cooperate with enterprises in terms of scale (size of orders) and the prestige of cooperation. On a similar basis formed relationships with resellers. Enterprises are able to negotiate lower trading margins for their products and gain for themselves a larger share of the price of the final product or capture more market share through the use of price competitive advantage.
End consumers (in certain segments) are less sensitive to the price of products offered by large international enterprises, and such products are more consumer confidence. The result is higher prices compared to global companies with local competitors. International businesses also have a strong position in negotiations with the national public administrations. Governments in order to attract foreign direct investment often practiced for proposals for creating attractive business environments, such as tax breaks, the ability to purchase real estate (land) at attractive prices, the possibility of investment in highly profitable economic activities and infrastructure (telecommunications, road).
Using by enterprises of differences and common characteristics of the domestic market compared with foreign markets, provided their activity in many foreign markets leads to: 1) increase sales, 2) reduce costs, 3) improving the elasticity, 4) ability to reduce risk. It will help to benefit businesses as at the entrance to foreign markets, and at the exit of the foreign markets and, above all, and financial advantages.
Advantages of the entrance to foreign markets are organizing a chain of value so as to make optimal use of the difference between costs and outcomes (effectiveness) using resources in different countries, i. e. the circuit layout is the cost to those foreign markets, where spending on the implementation of specific activities are minimal compared with the domestic, as well as other foreign markets. Benefits from the exit of foreign markets include the use of common features and differences in the situation of demand for products and competition in the markets of different countries, ie is able to get out of a particular foreign market by switching to another foreign market without reducing the overall performance of a critical de-
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cline in demand for products or significantly increasing Financial benefits of internationalization are to opti-
the level of competition in the separate market. Getting mize the tax burden on enterprises through international advantage now out of the market as possible and in the pricing, license fees (from affiliates in foreign markets) case where the activity on other foreign markets are more and placement offices (branches) in countries with low efficient, but an enterprise is unable (enough resources, taxes. etc.) to log on to a foreign market.
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Information about the author
Pavlo H. Ilchuk, Doctor of Economics, Docent, Head at Department of Management Technology,
Institute of Administration and Postgraduate Education, Lviv Polytechnic National University
Address: 63/50 Knyagyni Olgy Str., 79053, Lviv, Ukraine, tel.: +38 (097) 942-83-25
E-mail: pavlo. g.ilchuk@lpnu.ua
ORCID: http://orcid.org/0000-0003-4636-230
