Which MNC sends employees abroad to work there?

Internationalization of companies pays off

The geopolitical risks have increased. Nevertheless, medium-sized companies should not be deterred by the internationalization of their company. Because many of them have the potential to open up new global markets.

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Entering an international market environment is a classic means of expansion that has proven itself. Foreign business and internationalization have proven to be profitable, especially for Germany, the world export champion. So far. Because since Donald Trump torpedoed world trade with punitive tariffs and other sanctions in favor of an America-first strategy, Brexit threatens, climate change can no longer be negated and the diesel crisis can no longer be ended, internationalization has become more difficult for companies.

2017 | book

International management

Basics, strategies and concepts

The textbook gives a comprehensive and clearly structured overview of international management strategies and concepts. Organizational and, in particular, procedural aspects of corporate management are presented in an international context.

As the study Unternehmensperspektiven 2019 on behalf of Commerzbank shows, for which 2,000 owners and managers at the first management level from companies of all sizes and from all sectors were surveyed, corporate leaders increasingly assess the international orientation of their business as a danger. Over three-quarters of the non-exporting German companies named bureaucracy as the biggest problem in foreign business (77 percent). In second place are the lack of skilled workers in Germany (71 percent), and in third place are political uncertainties abroad (68 percent). Price fluctuations in raw materials and import duties are further hurdles (57 percent)

Internationalization increases competitiveness

The geographical expansion of economic activities beyond national borders therefore has its pitfalls. Nevertheless, there are good arguments in favor of expanding abroad. According to the Commerzbank study, the main drivers are the high level of competitiveness and demand for German products abroad (81 percent), digitization (78 percent) and favorable financing conditions (73 percent).

But while large companies are currently continuing to develop new markets (48 percent) with diversification and innovation, for example in emerging countries (17 percent), smaller companies are concentrating more on the German market. According to the study, medium-sized companies with annual sales of up to 15 million euros are adapting their foreign activities by focusing more on the German market (46 percent) and the EU internal market (41 percent) in order to bypass the economic and political risks. Most often companies with trade relations in Turkey (33 percent) plan to withdraw from a sales market. However, the results of the study do not show any patent recipe for dealing with the increasingly unpredictable international business fields.

A total of 52 percent of all companies sell products or services abroad. According to the study, it is even 77 percent in the manufacturing sector. But unlike in the analysis from 2007, only six percent of companies are planning to start new business abroad.

Forms of international trade relations

But there are a few things to consider when internationalizing a company. So it is important to clarify in advance which form of market entry is the right one for a company. Matthias Sure, Springer author and professor for corporate management and international management at the Fresenius University of Applied Sciences in Cologne, distinguishes between four basic forms of international cross-border trade relations. In addition to the classic export and import activities, this also includes merchanting, processing and compensation transactions, he writes about the basics of internationalization.

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How medium-sized companies survive on the international stage

Hidden champions, however, often combine their narrow market focus with an international presence, writes Holger Reinemann, professor of general business administration and Springer author, in the book chapter "Growth phase - thresholds in corporate development" on page 122. This is considered a key success factor in the innovation process. "With the globalization of activities, economies of scale can be realized in addition to growth, which at least partially compensate for cost disadvantages compared to large companies," says Reinemann.

Since medium-sized companies with limited resources in many markets compete with large international corporations, "the choice of a niche strategy seems almost inevitable if positive corporate success is to be achieved," recommends Reinemann. "Empirical results point exactly in this direction," it says on page 118.

Globally, the formation of corporate and holding structures is necessary

Medium-sized companies must be aware that internationalization usually results in the establishment of subsidiaries in the respective target countries and that the company is increasingly developing a heterogeneous product range. This is also associated with the formation of corporate structures. "We speak of corporations when several legally independent companies are grouped under the uniform management of a ruling company", defines Reinemann.

What the structure of the parent company and the subsidiaries should ultimately look like depends on the product portfolio and the strategic goals, continues the Springer author. A holding structure is suitable "for medium-sized and large multi-product companies that want to maintain or obtain a high degree of strategic and structural flexibility", he writes on page 94.

Advantages of holding structure

Disadvantages of the holding structure

  • Great strategic and structural flexibility
  • Flat hierarchies are possible
  • Clear assignment of tasks, responsibilities and competencies
  • Use of tax advantages
  • Promotion of entrepreneurial thinking and acting
  • Latent risk of resistance from subsidiaries to the holding company
  • Tendency towards excessive control activities by the holding company
  • Emotional tensions between the employees of the subsidiaries and the holding company

Source: Holger Reinemann, Mittelstandsmanagement (2019), page 94.

Internationalization opportunities for medium-sized companies

Reinemann emphasizes that there are a number of opportunities associated with internationalization. The main driver for going global as a company is market size. Because it is simply more promising to market a product in a large market with many potential buyers than in a small market. Medium-sized companies could take advantage of this by consistently following the path of internationalization when introducing new products. This offers the following opportunities (page 153):

  • If sales are expanded to international markets, this enables economies of scale to be used. This is the case when the production costs per unit produced decrease with increasing production volume.
  • Relocating parts of production abroad creates greater customer proximity.
  • The company can become more resilient to exogenous shocks through greater geographical diversification or expansion of procurement sources.
  • Competition in international markets promotes product and process innovations in the company.
  • Internationalized companies can benefit from the technological know-how of their international partners in the innovation process.

Of course, an internationalization process also harbors risks for companies. For small and medium-sized enterprises (SMEs), according to Reinemann, these are partly due to the limited human and financial resources, which make them more susceptible to failure in foreign markets. In addition, the necessary know-how for foreign markets is often lacking, "because they have less international diversification". SMEs also reacted more sensitively to external challenges in foreign country markets.

Nevertheless, medium-sized businesses shouldn't let themselves be deterred from expanding abroad. Because despite the geopolitical turbulence, many German medium-sized companies have the potential to internationalize their company, the initiators of the Commerzbank study are certain. The study summary says: "Internationalization is part of the DNA of German SMEs".