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INTERNATIONAL BUSINESSModes Of International Business Expansion
PRESENTATION BY:-
Vanshaj Kumar 027
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LEARNING OBJECTIVES:
To explain the concept of expansion modes for InternationalBusiness
To examine strategic trade-offs in selecting expansion modes
To discuss trade-related expansion modes
To evaluate contractual expansion modes
To elucidate investment modes of expansion
To explicate strategy for selecting the expansion modes
To elaborate the decision-making process for selecting the
expansion modes
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Introduction
• Why firms engage in international business?
– To expand their sales
– To obtain resources
– To diversify their sources of sales and supplies
–
To minimize competitive risk
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International Business: Operations andInfluences
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For expanding business in foreign countries:
• A firm has to choose an appropriate expansion
mode.Expansion modes are specific forms of
entering a foreign country:
•
To have international presence• Achieve the firm’s strategic goals
A thorough conceptual understanding of various expansion mode alternatives is
imperative for making inernationalization
decisions.
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While evaluating trade-offs a firm has to
assess its ability and willingness to commit:
• Resources
• Risk perception
• Anticipated returns
• Desired extent of control & internalisation
• Flexibility
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• Right selection of modes of expansion has
significant operational and strategicimplications on firm’s success in
internalization.
• Marketing strategy and country segments also
need to be contemplated while working out
an expansion mode strategy.
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Five Stages of internationalization
• Domestic operation and marketing activities
• Infrequent exports
• Exports through independent representatives
or agents
• Establishment of sales subsidiaries
• Foreign production and manufacturing
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9
The Usual Pattern of Internationalization
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Strategic Trade-offs in selecting
International Business Expansion Modes:
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A FIRM HAS TO CHOOSE FROM A VARIETY OF
EXPANSION MODES DEPENDING UPON:
• Ability and willingness to commit resources in the
target country
• Magnitude of risk the firm is willing to take in its
international expansion• Types of return anticipated from overseas operations
• Extent of control to be exerted in the firm’s foreign
operations
• Level of externalization of the firm’s
resources including its intellectual prop.
• Desired flexibility of expansion modes
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International Business expansion modes
•
Modes of international business expansion isan institutional mechanism by which a firm
expands to its operation overseas. Modes are :
1. Trade related modes
2. Contractual modes
3. Investment modes
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TRADE-RELATED MODES:
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• EXPORTS: may be defined as manufacturing the
goods in home country and shipping them for sales
to other country.• INDIRECT EXPORTS: when a firm sells its products
through an export intermediary based in its home
country & does not take care of export activity.
A firm may expand internationally through indirect
exports using either of the following ways:
• Selling to a foreign firm or a buying agent an the home
country
• Exports through a merchant intermediary such as export
house, trading house etc .
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• Agents: agents do not take the title of the
goods and operate on behalf of principal
firms, rather than themselves on commission
basis.
Major types of export agents include:
• Importer’s buying agents
• Country controlled buying agents
•
Buying Offices: Overseas firms make theirpermanent presence in the suppliers countries
by way of establishing a permanent buying
office.
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• Merchant Intermediaries: Exports intermediaries that buy
and sell goods for a profit & take title of goods & assume risks
thereof.
• Merchant Exporter: collect produce from several
manufacturers or producers & export directly in their own
name.
• International trading Companies: are generally large
companies that accumulate, transport, and distribute goods invarious markets.
• Trading/Export houses: home country based firms involved in
international trading activities.
The State Trading corporation (STC) and Metals and Mineralstrading Corporation (MMTC) are the India’s largest trading
houses.
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• Direct Exports: when a company makes its
domestically produced products available in foreign
markets without employing any market intermediaryin the home country.
• Merchant Importers: is an overseas based trader
who imports products and further sells them to
wholesaler or retailer for profit.
• Distributors: the distributors in the target countries
to purchase the goods and subsequently sell them
either to a market intermediary or to ultimatecustomer.
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PIGGYBACKING- complementary exports
• A firm may expand its business in a foreign
country by using the distribution network of
another company .
• Under the piggybacking arrangement, the
exporting firm is termed rider whereas the
other firm with established distribution
channel in the target country is carrier.
• In , piggybacking exports, the
branding and market promotion
arrangements may differ.
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COUNTERTRADE
• Countertrade is a generic term that refers to various
forms of trade arrangements wherein the payment isin form of reciprocal commitments for other goods
or services rather than an exclusive cash transaction.
Countertrade mainly takes place because:• Scarcity of hard currency with importing country
• Restrictive importing country’s foreign exchange
regulations to conserve hard currency
• Balance of trade problems of importing countries
• Trade opportunity with restrictive market.
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E-modes of business expansion
• Use of information and communication
technology has rapidly grown over the recent
years of expanding business internationally.
• Hamaracd.com ,an Indian website offers more
than 25,000 of the most popular as well as
popular songs of saregama’s
collection.
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Contractual modes
• Contractual modes are often employed to make use of
strategic strengths & resources of a foreign based partner
company for international business expansion
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Factors influencing choice of foreign
partners for contractual alliances include:
• Strategic strength of partner that can be
translated into some business value
• Commitment to cooperative goals
• Mutual trustworthiness
• Experience of operating in multi-channel
environment.
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• International strategic alliance : when a firm
agrees to cooperate with one or more than
one firm overseas, to carry out a businessactivity wherein each one contributes its
different capabilities and strengths to the
alliance .
• Rapid growth in global strategic alliance
among large and small firms around the world
highlights of the significance of global
strategic alliances.
’
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PHILIP’S GLOBAL STRATEGIC ALLIANCE
INDUSTRY PARTICIPATING COMPANIES COUNTRY OF
INCORPORATION
Advanced telephone sys AT&T US
Compact disks Sony Japan
Electronic credit cards Compagnie des machine bull France
Lighting & electroniccomponents MatsushitaElectronic devices JapanHong Kong
Minicomputer software ICL PLC Britain
Mobile Communications Thomson / Siemens France / west Germany
Personal Memory systems Control data US
Semiconductors & microchips Intel US
Video recorders Grundig West Germany
Videotex software & systems Enidata Italy
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Advantages of international strategic alliance
• The investment cost is shared
• The internationalizing firm gets access to
tangible & intangible resources of the alliance
partner
• There is reduction in individual risks while
operating overseas
• The alliance partners often cooperate so as to
make use of their specific individual strengths
• Strategic alliances often promotes co-
operation among competitors for mutual
benefit.
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• INTERNATIONAL SUB-CONTRACTING
arrangements may involve supply of inputs,
such as raw materials, semi-finished goods,components and technical know-how to a
local manufacturer in a foreign country.
• Contract manufacturing has also been used as
a strategic tool for economic development in
number of countries ,such as Korea, Mexico,Thailand, China, etc.
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Turnkey projects
• Conceptually ‘turnkey’ means handling over a
project to the client , when its complete in all
respect and is ‘ready to use’ on ‘turning the
key’ .
• International turnkey projects include
conceptualizing, designing, constructing,
installing, & carrying out preliminary testing of
facilities.
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The major types of turnkey project include:
• Build and transfer (BT) : the firm conceptualizes,
designs, builds, carries out primary testing, and
transfers the project to the owner.
• Build ,operate , and transfer (BOT): the
internationalizing firm not only builds the projectbut also manages it for a contracted period before
transferring it to the foreign owner.
• build, operate, own (BOO): the internationalizing
firm is expected to buy the project once it has been
built , which results in foreign direct investment after
a certain time period.
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INTERNATIONAL LEASING• A firm may expand its business by leasing out new and
used equipment to a manufacturing firm in such
countries.
• The ownership of the property retains with the leasing
firm (i.e, lessor) throughout the lease period during
which the foreign- based user (i.e., lessee) pays leasingfee.
• International Lease finance corporation (ILFC),
headquartered in Los Angles, is the largest aircraft
lessor by value that had an inventory of about 1000
aircrafts by 2008.
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INTERNATIONAL LICENSING
A firm, makes its intangible assets, such as
patents, trademarks and copyrights, technicalknow-how and skills available for foreign
company for a fee termed as royalty.
• Licensing termed as powerful tool forinternational expansion with little financial
commitment.
Ex:- ARROW from America since 1851,followslicensing strategy to expand business.
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Licensing
• The property licensed
may include:
– Patents
–
Trademarks – Copyrights
– Technology
– Technical know-how
– Specific business skills
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Process and Trade-mark licensing
•Process Licensing: the license gets the right tomanufacture, produce and market the product
in the defined market area.
• Trade-mark Licensing: the licensee also gets
the rights to use trade –marks/trade-names,
besides using the process know-how.For instance, the brand Pierre Cardin was
considerable affected adversely consequent to
its licensing about 800 brands.
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CROSS - LICENSING
• It is a form of licensing involving mutual
exchange of intangible assets that may not
involve a cash payment .
• Cross – licensing is a mutual sharing of patents
between two companies
without exchange of
licensing fee.
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International Franchising
• Franchising is a special form of licensing in
which an internationalizing firm (franchisor)
provides intangible assets , such as
trademarks, process know-how etc., and
methods of doing business in a prescribedmanner in return of franchising fee.
• Franchising is a low-
risk low-cost business
expansion mode.
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Key Reasons for Franchising
Financial Gain
Market Potential
Saturated DomesticMarkets
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International franchising is beneficial as it:
• Facilitates rapid country entry with low entry
risk
• Requires low investment and overheads
• Avoids day-to-day hassles of business
operations
• Makes use of local entrepreneurs as
business partners and their skills
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Limitations of cross-franchising
• Restrictive host country regulations
• Problems in identifying and selecting right
franchisees
•
Franchisor gets ‘franchising fee’ rather thansharing the profits
• Lack of direct control
•
It adversely affects the brand equity if quality is lowered.
• Franchisor does not gain market
Market knowledge.
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INVESTMENT MODES
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A firm shifts its manufacturing operations
in foreign countries
• To effectively respond to market competition.
• To take advantage of host country incentive
• To gain access to the host country resources to
be used as inputs
• To shift manufacturing operation overseas
•
To have manufacturing basein market proximity
• To minimize logistics cost
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Overseas assembly or mixing
• In international assembly a manufacturer
exports components, parts or machinery in
completely knocked down condition and
assembles these parts at a site of foreign
country.• In the food and pharmaceuticals industry , the
equivalent industry known as mixing where in
the imported ingredients are used at thefirm’s overseas facilities.
JOINT VENTURES
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JOINT VENTURES• International Joint ventures offer equity
investment opportunities in foreign countrieswith sharing resources & risks with partner
firms
• The partner firms may be either one or more
local companies in the target country or firms
either from third country or home country.
Based on equity stake JV may be of 3 types:
• Majority (< 50% ownership)
• 50-50 % (equal ownership)
• Minority (> 50% ownership)
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Major benefits of international JV
• They provide access to countries where
complete ownership is restricted.
• Access to complementary strengths of the
partner firm besides capital
• They require less investment compared to
complete ownership
• Higher returns compared to trade related &
contractual modes of expansion
• Greater degree of control
• Reduce operating and political risks
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Limitations of JOINT VENTURE
• Shared control over overseas operations
• Risk of equity partner becoming a future
competitor
•
Management problems due to culturaldifferences
• Difference in goals
•
Trade-secrets are often shared• Lack of flexibility
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CASE STUDY
• Japanese consumer electronics company SONY corp.
and Swedish telecom firm Ericsson merged to
establish a 50-50 joint venture headquartered in
London in 2001 so as to combine Ericsson’s
technological leadership in telecommunication &
Sony’s global marketing strengths to make mobile
phones . Both companies have stopped making their
own mobile phones in 1995. Sony also introduced
Walkman branded music phones. In first quarter of 2006 Sony was the 4th largest manufacturer of
mobile phones in world.
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WHOLLY OWNED SUBSIDIARIES
• A firm expands internationally to have
complete control over its overseas operations
by the way of 100% ownership in the new
entity.
• Wholly owned subsidiaries help
internationalizing firm protect its technology
and skills from external sharing.
M j b fit f h ll d
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Major benefits of wholly owned
subsidiaries
• The firm exerts complete control over its
foreign operations
• The trade secrets, proprietary technology andother firm specific advantages (FSAs) retains
within the company
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Limitations of wholly owned subsidiaries:
• They require commitment of large financial
and other operational resources
• There are high investment, if also associated
with high risk exposure
• Considerable international experience &
exposure is required
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Greenfield Operations
•
Creating production and marketing facilitieson a firm’s own from scratch is termed as
green-field operations.
Mergers and acquisition
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Mergers and acquisition
• Transfer of existing assets of a domestic firm
to a foreign firm lead to mergers andacquisitions.
• Cross-border acquisitions involves transferring
management control of assets and operationof a domestic company to foreign firm.
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Acquisitions can be of following types:
• Minority : when a foreign firm acquires 10%
to 49% interest in a firm’s voting stock
• Majority: when a foreign firm acquires 50% to
99% voting interest
• Full outright stake: when a foreign firm
acquires 100% of voting stock
STRATEGY FOR SELECTING INTERNATIONAL
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STRATEGY FOR SELECTING INTERNATIONAL
BUSINESS EXPANSION MODE
Basic rules for selecting business expansion modes:• Naïve rule: the management uses same expansion
mode for all foreign markets ignoring the heterogeneity
of different foreign markets & expansion conditions.
• Pragmatic rule: it looks for a workable entry mode,
only if initial entry mode is not feasible.
• Strategy rule: helps maximize the profit contribution
over the strategic planning period subject to availability
of resources, risks, and non-profit objectives.
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Marketing Strategy and expansion modes
Sequential adoption of business expansion modes
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Sequential adoption of business expansion modes
BASED ON MARKET ASIA PACIFIC DIVIDED INTO
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BASED ON MARKET ASIA-PACIFIC DIVIDED INTO
5 SEGMENTS
• Platform countries: the firm can use these countries
as initial bases to gather intelligence & initiate first
contacts.
• Emerging countries: firms build up their initial
presence in countries by way of a representativeoffice.
• Growth countries: companies often build a
significant presence in these countries
• Maturing countries: the prime task here is to look
for further market developments
• Established countries: growth prospects are much
higher in these countries
Decision tree for selection of international business modes
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Contd…
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‘A self explanatory decision tree serves as a
useful tool for selecting an appropriate
international business expansion mode’
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Thank you