Expanding abroad opens up new opportunities for German companies to become more competitive and polished. Successful expansion requires careful planning and the right strategy.

In this article, you will learn what expansion is, how German companies are preparing to expand, and the benefits of expanding abroad. We also look at some key expansion strategies.

What’s in this article?

• What is expansion?
  
• Facts about the market expansion of German companies
  
• Why do German companies expand abroad?
  
• What are the advantages of expanding abroad?
  
• What are the strategies for market expansion?
  

What is expansion?

The term “expansion” essentially refers to any enlargement or extension of your business (i.e., company growth). Businesses have several ways to expand, including:

• Capacity expansion: Increasing production or distribution capacities
  
• Product diversification: Offering new products or services
  
• Acquisitions and mergers: Acquiring or merging with other businesses
  
• Market expansion: Developing new international markets
  

In this article, we focus on market expansion for German companies that want to offer their products and services across national borders. However, market expansion is not limited to the export of goods and services. Many businesses that operate in other markets take other steps, such as establishing a subsidiary, opening a branch office, or working with local partners.

Facts about the market expansion of German companies

According to a survey by the German Chamber of Commerce and Industry (DIHK), 31% of German companies with fewer than 200 employees planned to invest abroad in 2024. This is below the average of 37% in previous years. Among large companies with more than 1,000 employees, the proportion has also fallen slightly to 81%.

The Ernst & Young (EY) study “Future of the German Economy 2024” surveyed 115 top managers of German industrial companies about their future plans. 45% of companies plan to open new locations abroad. In comparison, only 13% of companies plan to open new locations in Germany.

In 2023, German businesses were the second most frequent investors in Europe after the US. France was the most sought-after investment destination: EY identified 183 German investment projects there in 2023. In Central and Eastern Europe, German businesses are the most prominent investor group. These figures also demonstrate the extensive international involvement of German business.

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Why do German companies expand abroad?

There are many reasons a German business might want to expand abroad. These can include unfavourable conditions, dissatisfaction with the domestic market, positive incentives, or opportunities in other markets. We can place these motives into two different categories: push factors and pull factors.

Push factors

One reason German companies might want to expand abroad is a poor economic situation in their home market. Going abroad can also make sense if growth is no longer possible in the domestic market – for example, due to strong competitors or market saturation. New markets offer new sales opportunities when the potential of the domestic market is lacking.

Rising wage costs, high energy prices, tax burdens, and increasing levies raise production costs. This can also prompt companies to look for lower-cost locations abroad. The same applies to lengthy approval procedures and high regulatory requirements, which make it difficult to do business. In addition to excessive bureaucracy, the lack of skilled labour can also motivate companies to set up operations in new regions.

Having a presence abroad can be particularly useful for suppliers when their buyers relocate their headquarters or set up new facilities. An example of this is automotive buyers setting up production facilities in Eastern Europe or Asia. This “follow your customer” approach means buyer needs can be met directly on site. Proximity to the purchasing companies shortens delivery times, reduces transportation costs, and simplifies coordination.

Companies with technically sophisticated products – such as those in mechanical engineering or medical technology – could also benefit from a physical presence abroad. They might be better able to adapt their products locally to the specific needs of a target market. They can take into account local standards, safety regulations, and cultural differences. In addition, having a local office in the target market makes it possible to directly implement individual customer requests, such as design adjustments or special feature enhancements.

Pull factors

In a Kreston Global report on economic mobility trends, almost half of the German entrepreneurs surveyed cited opportunities for market growth as the main motivation for their expansion. The second most frequently cited motivation, at 33%, was the desire for a competitive advantage through a market presence before the competition.

Increasing international demand for products and services can be another incentive to expand abroad. Indicators can include export figures, increased inquiries from abroad, or positive feedback from international partners.

Companies can benefit from expanding to countries with lower production costs, such as reduced labour costs, energy prices, and taxes. In addition, many countries offer tax benefits and investment incentives, such as tax breaks, investment grants, or free trade zones.

A physical presence in resource-rich countries gives companies direct access to key materials, such as metals or minerals. This can reduce production costs and stabilise the supply chain by lowering transportation costs and avoiding price fluctuations.

Push and pull factors for German companies expanding abroad

What are the advantages of expanding abroad?

When businesses expand abroad, there are always challenges and risks. These range from legal and regulatory hurdles to political instability and high investment costs. However, there are many advantages to market expansion for German companies. Here is an overview of the most important ones:

Increase in sales and profits

The main benefit of international expansion is access to new markets. Companies can acquire new customers, leading to increased sales and, ultimately, higher revenues and profits.

As sales grow, businesses can benefit from economies of scale. When production volumes increase, unit production costs typically decrease. These savings can be passed on to customers, potentially resulting in a better position relative to competitors. Alternately, prices can remain the same, and the company will retain the benefits of lower production costs.

Diversification and risk distribution

Expanding into different markets can minimise economic risk. Companies that expand abroad become less dependent on the economic situation in their home market. Having access to a stable market in another region will offset domestic crises or economic fluctuations. In this way, international companies can respond more effectively to different growth cycles and market conditions.

This provides protection against regional risks and strengthens long-term stability and corporate growth. Broadening the customer base also reduces dependence on individual customers, making it easier to compensate for the loss of a major customer.

More cost-effective production

German businesses that produce goods abroad can benefit from improved production conditions. In many countries, labour and energy costs and regulatory requirements are lower than in Germany. This can reduce production costs and increase the international competitiveness of German companies.

Potential for innovation and knowledge exchange

Access to international markets offers German companies the opportunity to increase their advancement potential. New technologies and market trends are emerging in different countries that can drive the development of products and processes. Through exchange with international partners, companies can benefit from this knowledge and strengthen their competitiveness.

International networking also promotes knowledge exchange within your organization. Intercultural experiences and exchanges with specialists from different markets broaden perspectives and promote creative solutions. This can contribute to technical improvements and the optimization of business processes and market strategies.

Brand awareness

An international presence allows German businesses to strengthen their brand awareness and image. Increased visibility promotes brand recognition and signals stability, experience, and international competence.

What are the strategies for market expansion?

There are some important approaches for German companies looking to expand abroad, depending on the industry, target market, and company size. Careful market analysis, consideration of local conditions, and clear objectives are important when choosing the right expansion strategy and achieving long-term success. Here are some options for market expansion:

Digital market development

The use of digital platforms, ecommerce, and online marketing provides a cost-effective way to enter international markets. This expansion strategy is particularly suitable for smaller companies that want to operate abroad without a physical presence. Challenges include adapting to cultural and regulatory differences. There are also some technical hurdles to overcome.

Export strategy

Pure export is a low-risk expansion strategy in which the business ships products directly from Germany to foreign markets. German companies can sell internationally without establishing a physical presence in the target countries. Challenges with this approach include logistics, customs regulations, and adaptation to local market requirements.

Subsidiaries

German companies could establish a subsidiary abroad. This strategy gives them full control over their business activities, but it also increases capital requirements and entrepreneurial risk.

Joint ventures

By cooperating with local companies, German companies can benefit from market knowledge, established networks, or existing resources. Joint ventures reduce investment risks and facilitate market entry. However, they require careful selection of partners and clear contractual arrangements to avoid conflicts of interest.

Licensing and franchising

Through licensing or franchising, companies can establish their brand and business model in new markets without having to invest capital in new locations. Licensees assume operational responsibility, while the German company benefits from royalties. This expansion strategy is particularly suited to industries such as hospitality, retail, and personal and business services.

Acquisitions and investments

Acquiring or investing in existing companies abroad can significantly accelerate market entry. This approach employs existing customer relationships, networks, and market knowledge. However, this expansion strategy usually requires a high level of investment and thorough testing.