{"id":4391,"date":"2020-08-18T08:24:06","date_gmt":"2020-08-18T08:24:06","guid":{"rendered":"https:\/\/commerceiets.com\/?p=4391"},"modified":"2020-08-18T08:24:06","modified_gmt":"2020-08-18T08:24:06","slug":"mode-of-entry-into-international-business","status":"publish","type":"post","link":"https:\/\/commerceiets.com\/mode-of-entry-into-international-business\/","title":{"rendered":"MODE OF ENTRY INTO INTERNATIONAL BUSINESS"},"content":{"rendered":"\n
INTERNATIONAL BUSINESS:<\/strong> International busines<\/a>s 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.<\/p>\n\n\n\n MODE OF ENTRY INTO INTERNATIONAL BUSINESS<\/strong><\/p>\n\n\n\n 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:<\/p>\n\n\n\n EXPORTING<\/strong><\/p>\n\n\n\n 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:<\/p>\n\n\n\n Direct Exports:<\/strong> 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.<\/p>\n\n\n\n Indirect Exports:<\/strong> 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:<\/p>\n\n\n\n ADVANTAGES OF EXPORTING<\/p>\n\n\n\n DISADVANTAGES OF EXPORTING<\/p>\n\n\n\n LICENSING<\/strong><\/p>\n\n\n\n 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<\/strong> and the manufacturer of the country that gets the license is known as the licensee<\/strong>. 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.<\/p>\n\n\n\n ADVANTAGES OF LICENSING<\/p>\n\n\n\n DISADVANTAGES OF LICENSING<\/p>\n\n\n\n FRANCHISING<\/strong><\/p>\n\n\n\n In this mode, an independent firm called the franchisee<\/strong> does the business using the name of another company called the franchisor<\/strong>.<\/p>\n\n\n\n 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.<\/p>\n\n\n\n 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.<\/p>\n\n\n\n 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\u2019s, KFC, Holiday Inn, Hilton etc.<\/p>\n\n\n\n ADVANTAGES OF FRANCHISING<\/p>\n\n\n\n DISADVANTAGES OF FRANCHISING<\/p>\n\n\n\n MANAGEMENT CONTRACTS<\/strong><\/p>\n\n\n\n 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.<\/p>\n\n\n\n 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.<\/p>\n\n\n\n TURNKEY PROJECTS<\/strong><\/p>\n\n\n\n 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.<\/p>\n\n\n\n ADVANTAGES OF TURNKEY PROJECTS<\/p>\n\n\n\n DISADVANTAGES OF TURNKEY PROJECTS<\/p>\n\n\n\n CONTRACT MANUFACTURING<\/strong><\/p>\n\n\n\n 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:<\/p>\n\n\n\n ADVANTAGES OF CONTRAT MANUFACTURING<\/p>\n\n\n\n DISADVANTAGE OF CONTRACT MANUFACTURING<\/p>\n\n\n\n FOREIGN DIRECT INVESTMENT<\/strong><\/p>\n\n\n\n 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.<\/p>\n\n\n\n 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.<\/p>\n\n\n\n Some of the reasons because of which companies opt for foreign direct investment <\/strong>strategy as the mode of entry into international business can include:<\/p>\n\n\n\n ADVANTAGES OF FOREIGN DIRECT INVESTMENT<\/p>\n\n\n\n DISADVANTAGES OF FOREIGN DIRECT INVESTMENT<\/p>\n\n\n\n JOINT VENTURES<\/strong><\/p>\n\n\n\n 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.<\/p>\n\n\n\n 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.<\/p>\n\n\n\n Both business entities share the investment, costs, profits and losses at the predetermined proportion.<\/p>\n\n\n\n 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.<\/p>\n\n\n\n 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.<\/p>\n\n\n\n ADVANTAGES OF JOINT VENTURE <\/p>\n\n\n\n DISADVANTAGES OF JOINT VENTURE<\/p>\n\n\n\n STRATEGIC ACQUISITIONS<\/strong><\/p>\n\n\n\n Strategic acquisition implies that the company acquires a controlling interest in an existing company in the overseas market. <\/p>\n\n\n\n This acquired company can be directly or indirectly involved in offering similar products or services in the overseas market.<\/p>\n\n\n\n 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.<\/p>\n\n\n\n ADVANTAGES OF STRATEGIC ACQUISITIONS<\/p>\n\n\n\n DISADVANTAGES<\/p>\n\n\n\n WHOLLY OWNED SUBISIDIARY OR GREEN FIELD VENTURING<\/strong><\/p>\n\n\n\n Wholly Owned Subsidiary is a company whose common stock is fully owned by another company, known as the parent company<\/strong>. A wholly owned subsidiary may arise through acquisition or by a spin-off from the parent company.<\/p>\n\n\n\n ADVANTAGES<\/p>\n\n\n\n Gain local market knowledge<\/p>\n\n\n\n It can be seen as insider who employs locals<\/p>\n\n\n\n Maximum control<\/p>\n\n\n\n DISADVANTAGES<\/p>\n\n\n\n High cost.<\/p>\n\n\n\n High risk due to unknowns<\/p>\n\n\n\n Slow entry due to setup time<\/p>\n\n\n\n PORTFOLIO INVESTMENTS<\/strong><\/p>\n\n\n\n Portfolio investments do not require the physical presence of a firm\u2019s 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.<\/p>\n\n\n\n Investors make decisions to acquire securities or invest money abroad for several reasons:<\/p>\n\n\n\n Portfolio investments can be made either by individuals or through special investment funds.<\/p>\n\n\n\n CONCLUSION<\/strong><\/p>\n\n\n\n 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.<\/p>\n\n\n\n