International Location - Business Issues

Many larger businesses now have operations of some kind in more than one country.

The factors that influence the decision to operate overseas are very similar to those a business considers when it chooses a domestic business location. However, the issues and challenges tend to be a little more complicated!

Amongst the factors driving the increasing internationalisation of business are:

• Cross-border mergers and acquisitions (e.g. a UK manufacturer buys a competitor in the USA)
• Organic growth overseas (e.g. a UK retailer opening stores in China)
• Moving production overseas – to enable faster lead times to customers
• Increasing use of offshoring (see further below)

The reasons for operating in international markets include:

Accessing demand in suitable markets

This is by far the most important reason for most businesses. Emerging markets like China, India and Brazil have enjoyed significantly better rates of economic growth in the last decade and increasing consumer incomes and business investment in those markets create attractive sources of revenue and profits.

The sheer size of demand in emerging markets, in addition to the fast growth, is also a major motivator.

Successful large businesses often find that their revenue growth prospects in the domestic market are constrained by:

• Lower growth – perhaps because the market is saturated
• Regulatory concerns about excessive market share

So they turn to international expansion as a way of driving forward revenues and profits for the shareholders.

Cost reduction

This is another major reason for operating overseas. Increasingly skilled labour is available at lower cost, which encourages businesses looking to reduce their cost base without compromising customer service.

To put the advantage of low-wage economies into perspective, the hourly cost of labour in India and China is around 5% of the cost of equivalent labour hours in economies like the UK and Germany. A business that has a labour-intensive production process is bound to be attracted by the potential cost savings – particularly if the business has to handle competitors based in those low-wage economies.

A decision to operate overseas raises several more issues for a business:

Exchange rates

Operating in another country almost certainly exposes a business to the effects of fluctuating exchange rates.

Trade barriers

The extent of protectionism varies around the world, but locating a business to avoid trade barriers is certainly important for businesses looking to compete effectively. Common types of trade barrier include quotas, tariffs on imported goods and government subsidies for domestic industries.

The European Union is an example of a free trade area, where there are no trade barriers for countries within the EU. However, the EU itself erects trade barriers against countries outside the EU – which is a common reason why firms choose to set up locations inside the EU

Political stability

Most developed economies enjoy relative political stability – i.e. there are no sudden or dramatic changes in the political landscape which impact on businesses. Other territories are less predictable. A possible danger of location in less stable political environments is that short-term changes to legislation can directly affect the viability of an overseas operation.