This question has two parts; be sure to answer both. First, describe the five benefits for companies of expanding internationally. Second, imagine that you are the CEO of REDO, a highly successful company that remodels and redecorates houses in the United States. The company also manufactures its own line of furniture, draperies, and home furnishings. Give an example of at least one way REDO might take advantage of each of these benefits.

Question

What will be an ideal response?

Answer 1

The benefits of expanding internationally are:

1. Availability of supplies. For example, for many years U.S. oil companies have expanded their activities outside the United States in seeking cheaper or more plentiful sources of oil. The managers of REDO will be able to source products from many other countries. For example, they might import high-end marble or granite from mines in Africa or Asia because purchasers of upscale homes often demand counters made from these materials.

2. New markets for old products. Sometimes a company will find, as cigarette makers have, that the demand for their product has declined domestically but that they can still make money overseas. A home remodeling and redecorating company like REDO may find itself with excess inventory of products that have gone out of fashion, such as particular fabrics, patterns, or furniture styles. The company can sells these products internationally, at lower prices, in markets that are less concerned with fashion.

3. Lower labor costs. For example, maquiladoras (manufacturing plants allowed to operate in Mexico with special privileges in return for employing Mexican citizens) provide less expensive labor for assembling everything from appliances to cars. Because labor costs are high in the United States, REDO might outsource the manufacturing of its furniture line (couches, tables, chairs, and so on) to other countries with lower labor costs (such as China or the Philippines). It might outsource its customer service to India, as so many other companies have done.

4. Access to financial capital. Many people across the world are eager to invest in U.S. companies. REDO may attract investors from other countries who are impressed by its profitability. Perhaps investors see REDO as the next IKEA, which has made a global success out of Scandinavian home design by offering good quality at an affordable price.

5. Avoidance of trade barriers. For example, Japan imposes tariffs on agricultural products, such as rice, imported from the United States. To avoid these penalties, a company might create a subsidiary to produce the product in the foreign country. REDO may find that it cannot export its furniture to Spain, which has placed an import quota on couches and chairs manufactured in other countries. If the Spanish market for REDO's furniture is large and profitable enough, REDO may decide to open a plant in Spain and manufacture furniture there, thereby getting around the quota. An additional benefit is that it will be less expensive for REDO to ship this furniture to other European countries from Spain than it would be to ship it from the United States.