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How Investing Overseas Can Help Your Domestic Market

Aug 18, 2007
Investing overseas can help a firm protect its domestic market in three different ways. The first is to establish foreign operations in countries where the firm has major clients (Ball et al., 61, 2006). For example, if a U.S. firm has many customers in France, establishing subsidiaries in France to service those customers will prevent competition by similar firms in France from acquiring those customers.

This strengthens the U.S. firm because they now have the opportunity to prove that they can service customers in France as well. This strategy is not very risky because the domestic firm already has customers in the foreign country. Rather than attacking the foreign market, the domestic firm is just defending itself from foreign competitors.

The second way a firm can protect its domestic market by investing overseas is to attack the foreign market in the hopes that the foreign firm will be so focused on defending its local market that it will lessen its efforts to gain customers in the domestic firm's market (Dell et al., 61, 2006).

For example, if Domestic Firm A sells a similar product or service as Foreign Firm B, DFA can begin operations in FFB's country in the hopes of taking away some of FFB's customers, and causing FFB to focus on keeping its own share of its domestic market. While FFB is being attacked in its own country, DFA can work on gaining more of its own domestic market away from FFB.

This technique is really one of deceptive distraction and is much riskier than the previous example because in this scenario the domestic firm must spend some resources "distracting" the foreign firm, and some resources on gaining a larger portion of its domestic market. Both of these tactics must be done at once if the plan is to succeed.

The final reason that investing overseas can strengthen a firm's domestic market has to do with costs of production. If a foreign firm can produce the same product at a lower cost than a domestic firm, and sell that product at a lower price (by exporting it) in the domestic country, then the domestic firm is at a disadvantage.

One way to become more competitive is to outsource part or all of a firm's production to the "cheaper" foreign country and continue to resell the product in the domestic firm's country (Ball et al., 61, 2006). Outsourcing allows the domestic firm to utilize the lower production costs in the foreign country while remaining competitive in its domestic market. This strategy is also not very risky because it is lowering the firm's costs while defending its domestic market against foreign competition. Rather than spending more of its resources, the aim of this technique is to reduce costs and gain resources.

Although considered controversial, outsourcing continues to be a necessary part of staying competitive in today's globalized world. Two leading countries in the market for less expensive, quality labor are China and India. However, less expensive labor is not the only characteristic firms are looking for when deciding where to outsource services or production. "Deep technical and language skills, mature vendors and supportive government policies" (BusinessWeek Online, March 20, 2007) are also key factors, all of which can be found in India. For countries like the United States, where wages are high, utilizing the people and skills found in other countries and expanding to become an international firm is quickly becoming a requirement rather than a choice.

Sources:

Bell, Donald A. et al. (2006). International Business: The Challenge of Global Competition. Mc-Graw-Hill Irwin. New York, New York. P. 61.

China, India Seen Dominating Outsourcing. (March 20, 2007). BusinessWeek Online.
About the Author
Rose Rivera writes for Business Now - A Generation Y Perspective . Focusing on Today's Best Business Strategies, and the New Generation of Leaders. Is Your Business Ready for Them? Find Out!
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