Экономические науки/ 2. Внешнеэкономическая деятельность

PhD, Marekha I.S.

Sumy State University, Ukraine

Global economic expansion of international corporations

Choosing to pursue global economic expansion is one of the most critical decisions made by many growth-hungry corporations. There are a variety of factors that influence such decisions. Here are some of the top reasons why corporations choose to expand internationally [1]:

1. Global expansion remains a major driver of revenue growth. Expanding into foreign markets tends to enhance revenue growth while improving a company’s return on capital and reinvestment rate. Revenue growth from non-domestic markets typically comes faster, while adding new revenue streams helps a company to maintain security and stability.

2. Businesses that expand internationally cultivate a broader customer base. In an era where global branding is more critical than ever before, the acquisition of a wider customer base and a broader brand footprint pays significant dividends. Additionally, companies with an international presence can leverage their specific understanding of global markets.

3. Expansion is being driven by the desire to increase market share and open new market. This is particularly true for European companies, and for businesses in markets that are underperforming economically. Companies can tap into higher profits and faster growth by entering overseas markets with more favorable prevailing conditions.

4. Expansion is frequently cost-saving strategy. Lowered production costs have long been a magnet for international growth. Western companies are fully aware of the labor cost savings they can achieve by outsourcing to China, India, Mexico, and several Eastern European countries. A factory worker in the United States or Europe typically costs between $15 and $30 per hour [2]. In contrast, a Chinese factory work earns less than $1 per hour, giving China a fifteenfold to thirtyfold advantage.

5. Companies are seeking what they can’t find at home. Companies are using international expansion to fulfill needs unserved by their domestic market.

6. The takeaway. There are some broadly-shared rationales driving most of today’s expansions. These include the desire to increase market share, lower costs, efforts to gain an edge on competitors and access to untapped sources of skill, technology, and capital.

7. International expansion is often a defensive maneuver. Companies can pursue overseas expansion as a counter to increased competition in their own market. Companies are also prompted to pursue international growth as a defensive tactic, gaining entry into potentially valuable markets before competitors can do.

Global corporations are integrated via M&A (mergers and acquisitions) mechanisms. A merger is a voluntary amalgamation of two firms on roughly equal terms into one new legal entity [3]. An acquisition is a corporate action in which a company buys most, if not all, of another firm’s ownership stakes to assume control of it. An acquisition occurs when a buying company obtains more than 50% ownership in a target company [4].

Every day, Wall Street investment bankers arrange M&A transactions, which bring separate companies together to form larger ones. Two companies together are more valuable than two separate companies. Strong companies act to buy other companies to create a more competitive, cost efficient company. The companies will come together hoping to gain a greater market share or to achieve greater efficiency. Because of these potential benefits, target companies will often agree to be purchased when they know they cannot survive alone.

The reasons behind international mergers and acquisitions are [5]:

1. Improving company’s performance.

2. Removing excess capacity.

3. Accelerating growth.

4. Acquiring skills and technologies.

5. Encouraging competitive behavior.

The field of mergers and acquisitions continues to experience dramatic growth. Without question, many companies still use deals to achieve economies of scale and improve efficiency. But increasingly, they’re also trying to achieve transformation. The number of reported M&A transactions and deal value worldwide hit record levels in 2015 (Fig. 1).

Figure 1. Global M&A activity [6, 2]

International corporations use global expansion to achieve economies of scale and improve efficiency. The enterprises driving economic globalization tend to be the most economically potent: large, fast growing, dynamic, and innovative.

References:

1. Top Reasons for Corporate Global Expansion [Електронний ресурс]. – Режим доступу : http://www.ctcorporation.com/corpations.

2. Globalization Cost Advantage [Електронний ресурс]. – Режим доступу : http://www.washingtontimes.com/news/2004/aug/23/20040823-084202-9845r/.

3. Merger : Definition and Meaning [Електронний ресурс]. – Режим доступу : http://www.businessdictionary.com/definition/merger.html.

4. Acquisition [Електронний ресурс]. – Режим доступу : http://www.investopedia.com/terms/a/acquisition.asp#ixzz4mWVyguSL.

5. Different Types of Mergers and Acquisitions [Електронний ресурс]. – Режим доступу : https://www.cleverism.com/different-types-of-mergers-and-acquisitions-ma/.

6. M&A Report. – Wilmer Cutler Pickering Hale and Dorr LLP, 2016. – 20 p.