Firms have three main reasons to go internationally according to the document: 1. Comparative advantage theory - Countries specialize in what they can produce most efficiently based on factors like technology and labor costs. Firms go internationally to take advantage of these differences. 2. Imperfect markets theory - Factors of production are not perfectly mobile between countries. Firms go internationally to access resources in other countries like labor. 3. Product cycle theory - Firms first establish in their home market then export, and eventually produce locally in foreign markets to reduce transportation costs and better compete as competition increases over time.

1. Faculty of Commerce
Department of Business Administration
An Explanation Of why firms have to go internationally?
Working paper
Submitted by
Mohamed Ahmed Mohamed Awad
Supervised By
Prof. Dr. Hayam H Wahba
Associate Professor of Business Administration
Faculty of Commerce – Ain Shams University
2012

2. Why we have to go internationally ?
There are three commonly held theories explain why firms have to go
internationally:-
1. The theory of comparative advantage.
2. The imperfect markets theory.
3. The product cycle theory.
The three theories explore firms motivates to expand their business
internationally as following :-
1. The theory of comparative advantage.
Growth of multinational business is due to the heightened realization that
specialization by countries can increase production efficiency . some countries , such
as Japan and united states have a technology advantage , while other countries, such
as Jamaica, Mexico, south Korea, have advantage in the cost of basic labor. Since
these advantage cannot easily transported, countries tend to use their advantage to
specialize in the production of goods that can be produced with relative efficiency .
this explains why countries such as Japan and united states are large producers of
computer components, while countries such as Jamaica, Mexico, south Korea are
large producers of agricultural and handmade goods.
according to this explanatory multinational corporations have to go to foreign
countries because of their comparative advantage such as technology, cost of labor ,
cost of capital. In addition, when a country specialize in some products , it may not
produce other products, so trade between countries is essential .
2. The imperfect markets theory.
In case of perfect markets (rationality of international tread) , so that the
factors of production such as labor were easily transferable , then other resources
would flow wherever they were in demand. The unrestricted mobility of factors
would create equality in costs and returns and remove the comparative cost
advantage.
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3. However , the real word suffer from imperfect market conditions where
factors of production are somewhat immobile. And there are costs and often
restriction on transferring funds and other resources among countries. Thus,
multinational corporation go internationally to earn foreign opportunities . such as
Nike and Gap often capitalize on a foreign country's resources.
3. The product cycle theory.
According to this theory, firstly firms become established in the home market
as a result of some perceived advantage over existing competitors. And the firm is
likely to establish itself first in it home country. Then foreign demand for the firm's
product will initially be accommodated by exporting. As time passes, the firm may
feel the only way to retain its advantage over competition in foreign countries is to
produce the product in foreign markets, thereby reducing its transportation costs.
This discussion merely suggests that, as a firm matures, it may recognize
additional opportunities outside its home country. Whether the firm's foreign business
diminishes or expands over time depend on how successful it is at maintaining some
advantage over its competition. Such as reduce producing costs or increase demand
for its product.
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