DISCUSS THE DIFFERENT MODE OF ENTRY INTO INTERNATIONAL BUSINESS?
INTERNATIONAL BUSINESS: International business consists of business transactions between parties from more than one country. The parties involved in such transactions may include private individuals, individual companies, groups of companies, or governmental agencies.
MODE OF ENTRY INTO INTERNATIONAL BUSINESS
Mode of entry may be defined as the institutional mechanism by which a firm makes it products or services available to the consumers in the international market. The following are the various mode of entry into international business:
Exporting is the easiest mode of entry into international business. Therefore most firms begin their international expansion using this model of entry. Exporting is the sale of products and services in foreign countries that are sourced from the home country. The exports are of two types:
Direct Exports: These include the sale of goods from the firm to the seller overseas directly. In this firm experience first hand information about the market. There is no intermediary involved.
Indirect Exports: In this, the exporter hires the expertise of someone else to facilitate the exchange. The intermediary charges the fee for its services. There are several types of intermediaries:
- Manufacturers’ export agents: who sell the company’s product overseas
- Manufacturers’ representatives: who sell the products of a number of exporting firms in overseas markets
- Export commission agents: who act as buyers for overseas markets
- Export merchants: who buy and sell on their own for a variety of markets.
ADVANTAGES OF EXPORTING
- It involves very little risk and low allocation of resources for the exporter.
- It increase sales and reduce inventories.
- Exporting also provides an easy way to identify market potential
- It establishes recognition of a name brand.
- If the enterprise proves unprofitable, the company can simply stop the practice with no diminution of operations in other spheres and no long-term losses of capital investments.
DISADVANTAGES OF EXPORTING
- Exporting can be more expensive because of the costs of fees, commissions, export duties, taxes, and transportation.
- Exporting could lead to less-than-optimal market penetration because of inappropriate packaging or promotion.
- Exported goods could also be lacking features appropriate to specific overseas markets.
- Additional market share could be lost if local competition copies the products or services offered by the exporter.
- The exporting firm also could face restrictions against its products from the host country.
In this mode of entry, the manufacturer of the home country leases the right of intellectual properties, i.e., technology, copyrights, brand name, etc., to a manufacturer of a foreign country. The license is granted for a predetermined fee. The manufacturer that leases is known as the licensor and the manufacturer of the country that gets the license is known as the licensee. In essence, the licensee is buying the assets of another firm in the form of know-how or R & D. The licensor can grant these rights exclusively to one licensee or nonexclusively to several licensees.
ADVANTAGES OF LICENSING
- Low investment of licensor.
- Low financial risk of licensor.
- Licensor can investigate the foreign market.
- Licensee’s investment in R&D is low.
- Licensee does not bear the risk of product failure.
- Any international location can be chosen to enjoy the advantages.
- No obligations of ownership, managerial decisions, investment etc.
DISADVANTAGES OF LICENSING
- It limits future profit opportunities associated with the property by tying up its rights for an extended period of time.
- By licensing these rights to another, the firm loses control over the quality of its products and processes, the use or misuse of the assets, and even the protection of its corporate reputation.
- Both parties have to manage product quality and promotion
- One party’s dishonesty can affect the other.
- Chances of misunderstanding.
- Chances of trade secrets leakage of the licensor.
In this mode, an independent firm called the franchisee does the business using the name of another company called the franchisor.
Franchising is mode in which the franchisee is granted permission to use a name, process, method, or trademark. And also the franchisor firm assists the franchisee with the operations of the franchise or supplies raw materials, or both.
The franchisor generally also has a larger degree of control over the quality of the product. Payment under franchising agreements is that the franchisee pays an initial fee and a proportion of its sales or revenues to the franchising firm.
EXAMPLES: The prime examples of U.S. franchising companies are service industries and restaurants, particularly fast-food concerns, soft-drink bottlers, and home and auto maintenance companies i.e. McDonald’s, KFC, Holiday Inn, Hilton etc.
ADVANTAGES OF FRANCHISING
- Low investment.
- Low risk.
- Franchisor understands market culture, customs and environment of the host country.
- Franchisor learns more from the experience of the franchisees.
- Franchisee gets the R&D and brand name with low cost.
- Franchisee has no risk of product failure.
DISADVANTAGES OF FRANCHISING
- Franchising can be complicated at times.
- Difficult to control.
- Reduced market opportunities for both franchisee and franchisor.
- Responsibilities of managing product quality and product promotion for both.
- Leakage of trade secrets.
Management contracts are contracts under which a firm basically rents its expertise or know-how to a government or company in the form of personnel who enter the foreign environment and run the concern.
This method of involvement in foreign markets is often used with a new facility, after expropriation of a concern by a national government, or when an operation is in trouble.
It is a special mode of carrying out international business. It is a contract under which a firm agrees to fully carry out the design, create, and equip the production facility and shift the project over to the purchaser when the facility is operational. The amount of relevant remuneration is charged for the same.
ADVANTAGES OF TURNKEY PROJECTS
- These projects are suitable for the large scale production.
- These projects are undertaken in collaboration with management contracts to achieve the highest level of efficiency.
DISADVANTAGES OF TURNKEY PROJECTS
- The project completion time is lengthy hence there are higher chances of currency risks.
- Due to lengthy project duration, the returns are not available in short time.
- Turnkey operations also face all the problems of operating in remote locations.
Contract manufacturing is another method firms use to enter the foreign arena or international business scenario. In this case, an MNC contracts with a local firm to provide manufacturing services. In this arrangement, the MNC subcontracts the production in two ways:
- In one scenario, the MNC enters into a full production contract with a local plant producing goods to be sold under the name of the original manufacturer.
- In a second scenario, the MNC enters into contracts with another firm to provide partial manufacturing services, such as assembly work or parts production.
ADVANTAGES OF CONTRAT MANUFACTURING
- Contract manufacturing has the advantage of expanding the supply or production expertise of the contracting firm at minimum cost.
- The MNC can diversify vertically without a full-scale commitment of resources and personnel.
DISADVANTAGE OF CONTRACT MANUFACTURING
- The firm forgoes some degree of control over the production supply timetable when it contracts with a local firm to provide specific services.
FOREIGN DIRECT INVESTMENT
Foreign Direct Investment involves a company entering an overseas market by making a substantial investment in the country. Some of the modes of entry into international business using the foreign direct investment strategy includes mergers and acquisitions, joint ventures and greenfield investments.
This strategy is suitable when the demand or the size of the market, or the growth potential of the market in the substantially large to justify the investment.
Some of the reasons because of which companies opt for foreign direct investment strategy as the mode of entry into international business can include:
- Restriction or import limits on certain goods and products.
- Manufacturing locally can avoid import duties.
- Companies can take advantage of low-cost labour, cheaper material.
ADVANTAGES OF FOREIGN DIRECT INVESTMENT
- You can retain your control over the operations and other aspects of your business
- Leverage low-cost labour, cheaper material etc. to reduce manufacturing cost towards obtaining a competitive advantage over competitors
- Many foreign companies can avail for subsidies, tax breaks and other concessions from the local governments for making an investment in their country
DISADVANTAGES OF FOREIGN DIRECT INVESTMENT
- The business is exposed to high levels of political risk, especially in case the government decides to adopt protectionist policies to protect and support local business against foreign companies
- This strategy involves substantial investment to be made for entering an international market
A joint venture is one of the preferred modes of entry into international business for businesses who do not mind sharing their brand, knowledge, and expertise.
Companies wishing to expand into overseas markets can form joint ventures with local businesses in the overseas location, wherein both joint venture partners share the rewards and risks associated with the business.
Both business entities share the investment, costs, profits and losses at the predetermined proportion.
This mode of entry into international business is suitable in countries wherein the governments do not allow one hundred per cent foreign ownership in certain industries.
For instance, foreign companies cannot have a 100 hundred per cent stake in broadcast content services, print media, multi-brand retailing, insurance, power exchange sectors and require to opt for a joint-venture route to enter the Indian market.
ADVANTAGES OF JOINT VENTURE
- Both partners can leverage their respective expertise to grow and expand within a chosen market
- The political risks involved in joint-venture is lower due to the presence of the local partner, having knowledge of the local market and its business environment
- Enables transfer of technology, intellectual properties and assets, knowledge of the overseas market etc. between the partnering firms
DISADVANTAGES OF JOINT VENTURE
- Joint ventures can face the possibility of cultural clashes within the organisation due to the difference in organisation culture in both partnering firms
- In the event of a dispute, dissolution of a joint venture is subject to lengthy and complicated legal process.
Strategic acquisition implies that the company acquires a controlling interest in an existing company in the overseas market.
This acquired company can be directly or indirectly involved in offering similar products or services in the overseas market.
One can retain the existing management of the newly acquired company to benefit from their expertise, knowledge and experience while having your team members positioned in the board of the company as well.
ADVANTAGES OF STRATEGIC ACQUISITIONS
- The business does not need to start from scratch as one can use the existing infrastructure, manufacturing facilities, distribution channels and an existing market share and a consumer base.
- The business can benefit from the expertise, knowledge and experience of the existing management and key personnel by retaining them.
- It is one of the fastest modes of entry into an international business on a large scale.
- Just like Joint Ventures, in Acquisitions as well, there is a possibility of cultural clashes within the organisation due to the difference in organisation culture.
- Apart from that there mostly are problems with seamless integration of systems and process. Technological process differences is one of the most common issues in strategic acquisitions.
WHOLLY OWNED SUBISIDIARY OR GREEN FIELD VENTURING
Wholly Owned Subsidiary is a company whose common stock is fully owned by another company, known as the parent company. A wholly owned subsidiary may arise through acquisition or by a spin-off from the parent company.
Gain local market knowledge
It can be seen as insider who employs locals
High risk due to unknowns
Slow entry due to setup time
Portfolio investments do not require the physical presence of a firm’s personnel or products on foreign shores. These investments can be made in the form of marketable securities in foreign markets, such as notes, bonds, commercial paper, certificates of deposit, and non-controlling shares of stock. They can also be investments in foreign bank accounts or as foreign loans.
Investors make decisions to acquire securities or invest money abroad for several reasons:
- To diversify their portfolios among markets and locations
- To achieve higher rates of return
- To avoid political risks by taking their investments out of the country
- To speculate in foreign exchange markets.
Portfolio investments can be made either by individuals or through special investment funds.
Before entering into the international market, the firm should crucially decide its operational business strategy. Depending upon the growth and diversification needs of the business, the appropriate mode of international business should be selected. The factors to be considered in mind are ability and willingness of firm to commit to resources, level of control desired, level of risk a firm is willing to take, intensity of competition, quality of infrastructure etc.
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