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Why do firms become multinational?

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Quick Answer

Companies expand into international markets to increase their profits, gain access to cheaper materials, diversify and reach a larger target audience. Expanding globally presents opportunities for some companies, but also presents some risks, says Forbes. Company managers should consider several factors when deciding whether or not to pursue international expansion, including their financial situation, type of product or service and company image.

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Full Answer

Businesses entering into global markets might enjoy a greater production of products with cheaper labor and production costs. They might also experience a lower level of risk, as they are diversifying across a larger market, according to Forbes. This, in turn, reduces the likelihood of regional issues hindering sales.

Companies expanding overseas also have the opportunity to extend their customer bases and in turn boost sales. However, organizations should also determine whether or not, and to what extent, to localize products. Organizations selling items to general consumers, rather than a select group, often benefit from localizing merchandise.

Although expanding globally may improve business, companies inevitably face some risks and hurdles. Foreign rules and regulations may impact sales and production, while cultural misunderstandings and complicated cash flows can hurt businesses. Some companies face the threat of more complex operations and dissolution of brand identity. Lastly, while some businesses enjoy increased sales by expanding, others see an increase in the cost of doing business.

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