DIFFERENT MODES OF ENTRY INTO

INTERNATIONAL BUSINESS

By

Rizwan

Dhanesh

Prathamesh

Different modes of entry

EXPORTING

-indirect exporting-direct exports-intra-corporate

transfers

LICENSING

FRANCHISING

SPECIAL MODES-Contract manufacturing-Management Contracts-Turnkey projects

FDI without alliances

FDI with alliances

Forms of Exporting

Indirect exporting

Direct exporting

Intra-corporated

transfer

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Indirect involvement means that the firm participates in international business through an intermediary and does not deal with foreign customers or markets.

Direct involvement means that the firm works with foreign customers or markets with the opportunity to develop a relationship.

Forms of Exporting

Indirect Exporting

U.S.A

• Company A transfer to company B

Malaysia

• Company C sell to Malaysian

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Exporting of goods and services through various home-based exporters Manufacturers’ export agents Export commission agents Export merchants International firms

Indirect Exporting – Eg.

Direct Exporting

China

• Company A

Malaysia

• Company C

Intra-corporate Transfer

U.K

• Company A

Malaysia

• Company A

Exporting

Advantages

Relatively low financial exposure

Permit gradual market entry

Acquire knowledge about local market

Avoid restrictions on foreign investment

Licensing is when a firm, called the licensor, leases the right to use its intellectual property—technology, work methods, patents, copyrights, brand names, or trademarks—to another firm, called the licensee, in return for a fee.

The property licensed may include: Patents Trademarks Copyrights Technology Technical know-how Specific business skills

Licensing

Licensor leases the rights to

use intellectual property

Licensee uses the intellectual

property to create products

Pays a royalty to licensor

Earns new revenues with low investment

The Licensing Process

Basic Issues in International Licensing

Specifying the boundaries of the agreement

Determining compensation Establishing rights, privileges, and

constraints Specifying the duration of the contract Eg. Pepsico, Coke Bottling Plant

Licensing –Adv. & Disadv.

Advantages •Low financial risks•Low-cost way to assess market potential •Avoid tariffs, NTBs, restrictions on foreign investment•Licensee provides knowledge of local markets

Disadvantages

•Limited market opportunities/profits•Dependence on licensee•Potential conflicts with licensee•Possibility of creating future competitor

Under franchising, an independent organisation called the franchisee operates the business under the name of another company called the franchisor.

In such an arrangement the franchisee pays a fee to the franchisor.

Franchising is a form of Licensing but the Franchisor can exercise more control over the Franchisee as compared to that in Licensing.

Franchising

Franchising Agreements

Franchisee has to pay a fixed amount and royalty based on sales.

Franchisee should agree to adhere to follow the franchisor’s requirements

Franchisor helps the franchisee in establishing the manufacturing facilities

Franchisor allows the franchisee some degree of flexibility.

Eg. McDonalds, Subway, KFC

Franchising- Adv. & Disadv.

Advantages•Low financial risks•Low-cost way to assess market potential•Avoid tariffs, NTBs, restrictions on foreign investment•Maintain more control than with licensing•Franchisee provides knowledge of local market

Disadvantages

•Limited market opportunities/profits•Dependence on franchisee•Potential conflicts with franchisee•Possibility of creating future competitor

Specialized Entry Modes

Management Contract

Turnkey Projects

Contract Manufacturing

Contract manufacturing

Contract manufacturing is outsourcing

entire or part of manufacturing operations. E.g.: pharmaceuticals, Personal Care

products etc The iPad and iPhone, which are products

from Apple Inc., are manufactured in China by Foxconn. Hence, Foxconn is a contract manufacturer and Apple benefits from a lower cost of manufacturing devices

Contract Manufacturing-Adv. & Disadv.

Advantages

•Low financial risks•Minimize resources devoted to manufacturing•Focus firm’s resources on other elements of the value chain

Disadvantages

•Reduced control (may affect quality, delivery schedules, etc.)•Reduce learning potential•Potential public relations problems

A management contract is an agreement between two companies whereby one company provides managerial assistance, technical expertise and specialised services to the second company for a certain period of time in return for monetary compensation.

Eg. Schools, sports facilities, hospitals, office buildings, malls and large businesses have on-site cafeterias, restaurants.

Management Contract

Management Contract

Advantages

•Focus firm’s resources on its area of contracts•Minimal financial exposure

Disadvantages

•Potential returns limited by contract expertise•May unintentionally transfer proprietary knowledge and techniques to contractee

A turnkey project is a contract under which a firm agrees to fully design, construct and equip a manufacturing/business/service facility and turn the project over to the purchaser when its ready for operation, for a remuneration.

Turnkey Project

Turnkey Project

Advantages • Focus firm’s resources on

its area of expertise• Avoid all long-term

operational risks

Disadvantages • Financial risks

• Cost overruns• Construction risks

• Delays• Problems with suppliers

FDI without alliances

Companies enter the international market through FDI , invest their money, establish manufacturing and marketing facilities through ownership and control.

Greenfield strategy- the term Greenfield refers to starting of the operations of a company from scratch in a foreign market.

Greenfield Strategy

Advantages

•Best site•Modern facilities•Economic development incentives•Clean slate

Disadvantages

•Huge time and patience needed•Expensive •Comply with local and national regulation•Local workforce needed•Strongly perceived as a foreign worker

FDI with strategic alliances

Strategic alliance is a cooperative and collaborative approach to achieve the larger goals.

Role of alliances Many complicated issues are solved through

alliances They provide the parties each other’s strengths Helps in developing new products with the

interaction of 2 or more industries Meet the challenges of technological revolution. Managing heavy outlay Become strong to compete with a multinational

company.

Modes of FDI through alliances are: Mergers and acquisitions Joint ventures

FDI with strategic alliances

Merger : The combining of two or more companies, generally by offering the stockholders of one company securities in the acquiring company in exchange for the surrender of their stock.

Acquisition : When one company takes over another and clearly established itself as the new owner, the purchase is called an acquisition.

HDFC Bank acquisition of Centurion Bank of Punjab for $2.4 billion

Mergers and Acquisitions

Acquisition Strategy

Advantages

• Obtains control over the acquired firm such as factories and brand names• Integrate the mgt of the firm into its overall international strategy

Disadvantages

• Assumes all the liabilities such as financial and managerial

A joint venture is an entity formed between two or more parties to undertake economic activity together. The parties agree to create a new entity by both contributing equity, and then they share in the revenues, expenses, and control of the enterprise.

Sony-Ericsson is a joint venture by the Japanese consumer electronics company Sony Corporation and the Swedish telecommunications company Ericsson to make mobile phones

Joint Ventures

Advantages: Benefit from local partner’s knowledge. Shared costs/risks with partner. Reduced political risk.

Disadvantages: Risk giving control of technology to partner. May not realize experience curve or location

economies. Shared ownership can lead to conflict

Joint Ventures

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