Forces Driving Globalization
Going international is becoming an imperative for many companies in order to increase the value of their business.
Companies that want to build a long term, sustainable business no longer have the luxury of remaining a purely domestic operation. In today's economy the need to develop an international presence is driven in large part by forces outside the company's control. There are a number of factors that make rapid international expansion a necessity, rather than an option to be reviewed when the time is right.
In the good old days, 8-10 years ago, software companies could develop a product, market it at home, and then quietly start to sell their technology in overseas markets, often going after one market at a time. With the Internet, however, a product or business concept is there for everyone to see, and as a result, competitors in overseas markets are able to replicate the product or service. There have been many cases of U.S. companies going to Europe, only to find that their business model, their name and their Website have been replicated.
While the U.S. is still the dominant force in technology development, we are seeing a lot of innovation from new markets. I have been to places like Sweden, Israel, South Africa, India, Singapore and China, and the level of innovation is impressive. This means that U.S. companies will be facing new competitors from other countries, and they will be targeting the same markets. This will increase the competition for clients and channels.
Investors like companies with a successful international operation, even if they have been much more cautious about encouraging their client companies to invest overseas in the current economic climate. The reasons mentioned above are contributing factors, but the more important issue is that since technology companies are generally valued based on their revenues, generating overseas sales accelerates the increase in market value. In addition, companies with international sales often carry a premium on their multiple of 40-70% because the potential growth rate will be much higher than that of a purely domestic operation.
There are three major trading blocks in the world economy: North America, Europe and Asia-Pacific. They do not always move up and down at the same time, so a company makes itself less vulnerable to economic slowdowns in one region by having a diverse source of revenues. This emerged as a real factor in the aftermath of the Internet bubble and the subsequent telecom meltdown. The European market, while slowing down, was not been hit nearly as hard as the U.S., so companies with significant operations in Europe were able to partially offset the slower sales at home.
It is in our blood to expand, and it always has been. From the Romans to the Vikings to the European nations building empires in the 17th and 18th centuries, man has conquered new territories as a way to increase commerce. The same is true for companies, and there are very few great companies that became great without a significant international operation.
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