International expansion represents a way of earning greater returns for companies by transferring the skills and product offerings derived from their unique competencies to markets in which indigenous competitors lack those skills. Due to national differences, a company can benefit by basing each of activity it performs at the location where factor conditions are most favourable to the performance of that activity. This is referred to as location advantage. By increasing sales volume rapidly, global expansion can assist a company in the process of moving down the experience curve.
The best choice of strategy for a company to pursue is affected by two kinds of pressures: pressures for cost reductions and pressures for meeting the needs of local markets (local responsiveness). Pressures for cost reductions are greatest in industries producing commodity-type products, for which price is the main competitive weapon. Pressures for local responsiveness arise from differences in consumers’ tastes and preferences in national infrastructure and/or traditional practices, in distribution channels, and in demands by host governments.
Companies following an international strategy transfer the skills and products derived from unique competencies to foreign markets and at the same time undertake some limited local customization. Companies pursuing a multidomestic strategy customise their product offering, marketing strategy, and business strategy to national conditions. Companies pursuing a global strategy focus on deriving benefits from cost reductions that come from experience-curve effects and location advantages. There are five different ways of entering a foreign market-exporting, licensing, franchising, entering into a joint venture, and setting up a wholly owned subsidiary. The optimal choice among entry modes depends on the company’s strategy.