Over the horizonJanuary 25, 2011
Companies have been expanding overseas for centuries and, although the nature of international investment may be different today, the drivers behind entering new markets have remained remarkably consistent.
By Morgen Witzel
International expansion is one of the oldest themes in the history of business.
Almost from the dawn of recorded history, businesses have looked over the horizon for new opportunities and sought to expand, first outside their home city or province, then into other countries. From the 16th century onwards, European expansion was led by the “chartered companies”, which received a charter from the crown to trade and usually claimed a monopoly over a particular market.
Among the most famous of these were the East India Company and the Hudson’s Bay Company.
But these chartered companies were often inefficient. Monopolies and state support meant that many of them were feather-bedded against competition. By the mid-19th century, the tide was turning against the chartered companies.
The East India Company was abolished in 1858, and other companies went bankrupt. Some transformed themselves into purely private enterprises. The Hudson’s Bay Company, for example, became Canada’s largest retail business.
Drivers for expansion
By the mid-19th century, new, purely private-sector companies were beginning to emerge. The Industrial Revolution in Europe and North America had generated enormous wealth and created very large businesses and, by the end of the 19th century, these too were beginning to look overseas.
In some cases, they expanded in order to control their supply chains. Lever Brothers, unable to obtain a steady supply of high-quality palm oil for its soaps, began establishing its own plantations, first in West Africa and later in the Solomon Islands. The American-based United Fruit Company expanded into Central America in order to control its own banana plantations.
Others expanded overseas in pursuit of the raw resources needed by modern economies. Nowhere was this more evident than in the oil business. The evolution of companies such as Royal Dutch/Shell and Anglo-Persian (now BP) are clear examples.
Other entrepreneurs created new market categories. In the 1840s, Thomas Cook pioneered the concept of the package holiday, selling complete holidays including railway tickets, hotels and meals to the English middle classes.
In the 1850s, the British railway companies realized the potential and tried to corner the market for themselves. Cook’s response was to go overseas. By 1900, Cook’s was a truly international business with operations on every continent, selling tours for wealthy Indians to come to Europe and affluent Muslims to go on pilgrimage to Mecca.
The mass market
In the first decade of the 20th century, American firms entered international markets in force. Ford, General Motors, Heinz and Singer Sewing Machines were among the pioneers.
First and foremost, these companies were seeking new revenue streams. Although domestic markets still offered opportunities for growth, these companies foresaw the day when those markets would become saturated.
They also believed that there was a ready international market for their products. Some, like Ford and Heinz, expanded organically by setting up factories overseas. Others, such as General Motors, grew by acquisition, buying up small local companies and investing in them.
By the end of the 1920s, American companies could be found operating in Latin America, Africa, China and Australia – indeed, wherever local authorities would allow them access and where they could find a market.
Economic and political influence
During the Great Depression and the Second World War, international expansion slammed to
Many companies operating internationally suffered heavy damage to facilities. But in the 1950s and 1960s, American multinationals began to expand rapidly again. This time, they had support from the US government and, as in the age of the chartered companies, there was a strong political motive.
The US government recognized that American businesses could also help to expand the political sphere of influence. These multinationals were thus key players in the Cold War against the Soviet Union and its allies, to the extent that the collapse of the Soviet Union was seen by some as a victory for capitalism.
In the 1980s, Japanese multinationals began their great drive overseas. Japan has few natural resources, and the supply of cheap labor was beginning to dry up. Domestic markets were also becoming saturated.
Companies like Sony, Matsushita, Toyota and Honda had little choice but to expand internationally. Some did so with the support of the Japanese government which, like the 17th-century monarchs, saw exports as a way of helping strengthen the economy.
What drives the globalizing companies of today?
Certainly politics still plays a role, and among the key players in global markets are the state-owned sovereign wealth funds of the Gulf and Asia. They too carry the national flag and are charged with expanding their countries’ sphere of influence. American and European multinationals still go overseas chasing resources, including cheap labor, and seeking markets.
But the times are changing, and now Indian and Chinese companies are also expanding into other markets for the same reasons. The dynamics of expansion are shifting as economic conditions and the political environment change; but the reasons why companies choose to expand overseas have not changed for centuries.Download full pdf version of T Magazine issue 03 (3.6 MB)