Module 2 : Modes of entry in to International Business

Syllabus: Modes of entry into International Business, Internationalization process and managerial
implications case studies related to internationalization process. International business approaches:
ethnocentric, polycentric, regiocentric, geocentric.

2.1 Modes of Entry in to International Business

When a domestic company plans to engage in international business, the company has to select the
mode of entry into the foreign country based on all relevant factors like the size of business, influence of
environmental factors, attractiveness of the foreign market, market potential costs and benefits and risk
factors.
Different modes of entry to foreign markets include: • Direct Exporting • Licensing arrangements with
foreign companies • Franchising arrangements with foreign companies • Contract manufacturing,
Management contracts & Turnkey projects • Strategic Alliances: Joint ventures • Strategic Alliances:
Mergers and acquisitions • 100% Foreign Direct Investment (Greenfield Investment)

1. Direct Exporting
Direct exporting involves you directly exporting your goods and products to another overseas market.
For some businesses, it is the fastest mode of entry into the international business. Direct exporting, in
this case, could also be understood as Direct Sales. This means you as a product owner in India go out, to
say, the Middle East with your own sales force to reach out to the customers. In case you foresee a
potential demand for your goods and products in an overseas market, you can opt to supply your
goods to an importer instead of establishing your own retail presence in the overseas market.
Then you can market your brand and products directly or indirectly through your sales representatives
or importing distributors. And if you are in an online product based company, there is no importer in
your value chain. (Example: Companies like Sunflag Steel and Lloyds steel are using method of direct
exports. Many midsized Indian IT companies have their sales offices in different countries and use this
method of International Business. While small scale textile mills and handloom cloth manufacturers in
India sell their products in international market through import houses in those host countries)

Advantages of Direct Exporting

● You can select your foreign representatives in the overseas market.
● You can utilize the direct exporting strategy to test your products in international markets before

making a bigger investment in the overseas market.

● This strategy helps you to protect your patents, goodwill, trademarks and other intangible assets.

● As the foreign market is unknown to you, you can have the leverage of market know how of the local

importer in the host country.

● Barrier to entry and exit is less.

Disadvantages of Direct Exporting

● For offline products, this strategy will turn out to be a really high cost strategy. Everything has to be

setup by your company from scratch. 

● While for online products this is probably the fastest expansion strategy, in the case of offline products,

there is a good amount of lead time that goes into the market research, scoping and hiring of the
representatives in that country.
● This mode does not provide you competitive advantage over your foreign competitors.

2. Licensing and Franchising 

Companies which want to establish a retail presence in an overseas market with minimal risk,
the licensing and franchising strategy allows another person or business assume the risk on behalf of the
company.
In Licensing agreement and franchise, an overseas-based business will pay you a royalty or commission
to use your brand name, manufacturing process, products, trademarks and other intellectual properties.
While the licensee or the franchisee assumes the risks and bears all losses, it shares a proportion of their
revenues and profits with you.
In licensing, a firm makes its intangible assets, such as patents, trademarks and copyrights, technical
know-how and skills (technical guidance, feasibility and product studies, manuals, engineering, designs,
etc.) available to a foreign company for a fee termed as royalty.

The home-based firm transferring the intellectual property is known as the licensor whereas the foreign
based firm is known as licensee. The licensee makes use of these intangible assets in production
processes. International licensing is common in pharmaceuticals, toys, machine tools, publishing, etc.

Licensing serves as a powerful tool for international expansion with little financial commitment. A firm’s
limited financial resources to invest in several countries and lack of foreign market knowledge influences
a company to expand business overseas by way of licensing.

Besides, licensing is often adopted in view of environmental factors, such as country entry barriers, to
curb product piracy and counterfeiting, and for expanding into countries where the market size is not
large enough to justify higher investments.
 Arrow, ‘America’s shirt maker since 1851’ follows the licensing strategy to expand worldwide. Presently,
it has licensees in more than 90 countries, with a wholesale value approaching US$300 million. It
entered India in 1993 through licensing to Arvind Clothing, a wholly owned subsidiary of Arvind Mills
Ltd. 

In franchising, the parent company in country of origin is called franchiser and the company in host
country is called franchisee. Franchisee can operate any two of the models of franchising i.e. business
format franchisee or product franchisee. (Example: KFC and McDonalds operate their international
business in India using Franchising model)
This strategy can be used when the company is already well established and has high brand equity in
parent country plus it is gaining a segment of loyal customers in host country through its entry level
strategy of internationalization. At this juncture, company needs to extend or fill in gaps in their existing
product lines considering the requirements of the host country.

Advantages of Licensing and Franchising

● Low cost of entry into an international market

● Licensing or Franchising partner has knowledge about the local market

● Offers you a passive source of income

● Reduces political risk as in most cases, the licensing or franchising partner is a local business entity

● Allows expansion in multiple regions with minimal investment

● Your brand is promoted in the host country market. Hence it helps in building your brand equity

worldwide.
Disadvantages of Licensing and Franchising
● In some cases, you might not be able to exercise complete control on its licensing and franchising

partners in the overseas market

● Licensees and franchisees can leverage the acquired knowledge and pose as future competition for your

business
● Your business risks tarnishing its brand image and reputation in the overseas and other markets due to

the incompetence of their licensing and franchising partners

3. Contract Manufacturing, Manufacturing contracts and Turn key Projects

In order to take advantage of lower costs of production, a firm may sub-contract manufacturing in a
foreign country. 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.
 The contract manufacturer limits itself to production activities whereas marketing is taken care of by the
internationalizing firm. A processing fee is paid to a foreign-based manufacturer who is primarily
responsible for processing or assembly.

Overseas-based contract manufacturers are often expected to supply the goods directly to the firm’s
clients and invoice for processing fee to the internationalizing firm. A substantial part of manufactured
exports comes from such activities. Contract manufacturing has also been used as a strategic tool for
economic development in a number of countries, such as Korea, Mexico, Thailand, China, etc. For
instance, Taiwan is a world leader in semi-conductor manufacturing. China produces 30 per cent of air
conditioners, 24 per cent of washing machines, and 16 per cent of refrigerators sold in the US.

Management Contracts: A firm that possesses technical skills or management know-how can expand
overseas by providing its managerial and technical expertise on contractual basis. It has widespread
acceptance in industries and countries that lack indigenous expertise to manage their own projects.

Under a management contract, a firm offers a variety of management or technical services, such as
technical support to run a production facility, training, and management.

A management contract is a feasible option when a company provides superior technical and
managerial skills to an overseas company, which needs such assistance to remain competitive in the
market or to improve its productivity or performance.

For instance, Indian companies have a large reservoir of skilled manpower and a great potential to
undertake international management contracts by way of transferring the technical expertise of their
professional manpower to other countries. Management contracts are common in the hotel industry so
as to take advantage of economies of scale, brand equity, and global reservation system.

International expansion strategy of Global Hyatt Corporation is primarily based on managing over 216
hotels across 44 countries through management contracts. In order to prevent dilution of quality and
hence brand erosion, it ensures that all the properties under its management contract follow and
maintain rules, regulations, benchmark practices, and standards as per its corporate policy.

Turnkey Projects: A company may expand internationally by making use of its core competencies in
designing and executing infrastructure, plants, or manufacturing facilities overseas. Conceptually,
‘turnkey’ means’ handing over a project to the client, when it is complete in all respect and is ‘ready to
use’ on ‘turning the key’. International turnkey projects include conceptualizing, designing, constructing,
installing, and carrying out preliminary testing of manufacturing facilities or engineering projects at
overseas locations for a client organization. It often includes providing training to the chent’s personnel
to operate the plant.

Major Turnkey projects are Build and Transfer (BT) , Build Operate and Transfer (BOT), Build Operate
and Own (BOO) and Build, Operate, own and transfer (BOOT).

Advantages of contract Manufacturing / Management contracts/ Turnkey Projects

● Low cost of entry into an international market
● Local partner has knowledge about the local market

● Reduces political risk as well as market risk

● Allows expansion in multiple regions with minimal investment

● Your brand is promoted in the host country market. Hence it helps in building your brand equity

worldwide.
● Reduced barriers of entry and exit

● Fasted diffusion in host country

Disadvantages of Licensing and Franchising

● In some cases, you might not be able to exercise complete control on partners in the overseas market

● Host country partners can leverage the acquired knowledge and pose as future competition for your

business
● Your business risks tarnishing its brand image and reputation in the overseas and other markets due to

the incompetence of their licensing and franchising partners

● Needs a strict monitoring and control over the processes in host countries to ensure high standards of

quality of product and service

4. Strategic Alliances:  Joint Ventures

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. (Example: Kirloskar and Toyota made a joint venture and set up a plant for manufacturing
vehicles near Bangalore. Kirloskar had a share of 51% and Toyota had a share of 49% at the time of
inception. New company was called Kirloskar Toyota Limited.)
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, and insurance, power exchange sectors and require to opt
for a joint-venture route to enter the Indian market.
In case of a Joint Venture, both the brands have a similar level of brand strength for that particular
product. And therefore, they wish to explore that product in that international market together.
 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 organization due to the difference in

organization culture in both partnering firms

● In the event of a dispute, dissolution of a joint venture is subject to lengthy and complicated legal

process.
4. Strategic Alliances: Mergers & Acquisitions 
Mergers & acquisitions imply that your 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. You 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.
This option is good if the brand name of the acquired company is good in the host country and the
parent company has good financial strength. (Example: Tata tea Ltd Acquired UK based Tetley Tea.
Employees of Tetley Tea are retained with addition of Tata’s directors on the board.)

A merger occurs when two separate entities combine forces to create a new, joint organization.
Meanwhile, an acquisition refers to the takeover of one entity by another. (Example: Disney and Pixar
merged together to form a new company while Google Acquired Android)

Advantages of Mergers& Acquisitions

● Your business does not need to start from scratch as you can use the existing infrastructure,

manufacturing facilities, distribution channels and an existing market share and a consumer base
● Your 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
 Disadvantages of Mergers & Acquisitions
● Just like Joint Ventures, in Acquisitions as well, there is a possibility of cultural clashes within the

organization due to the difference in organization 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.

6. 100% Foreign Direct Investment (Green Field 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 include mergers and acquisitions, joint ventures and Greenfield investments.
This strategy is viable when the demand or the size of the market, or the growth potential of the market
in the substantially large to justify the investment.

A Greenfield investment is a type of foreign direct investment (FDI) in which a parent company creates a
subsidiary in a different country, building its operations from the ground up. In addition to the
construction of new production facilities, these projects can also include the building of new distribution
hubs, offices, and living quarters.
he term "green-field investment" gets its name from the fact that the company—usually a  multinational
corporation (MNC)—is launching a venture from the ground up—ploughing and prepping a green field.
These projects are foreign direct investments—known simply as direct investments—that provide the
highest degree of control for the sponsoring company. In a green-field project, a company’s plant
construction, for example, is done to its specifications, employees are trained to company standards,
and fabrication processes can be tightly controlled.

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 raw material.

● Some countries welcome Foreign Direct Investments and cooperate well in establishment of such

ventures. India has a “make in India” concept for attracting foreign direct investments.
 Advantages of 100% Foreign Direct Investment
● You can retain your control over the operations and other aspects of your business

● Leverage low-cost labour, cheaper raw material and cheaper resources 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 ( especially in developing countries like India)
Disadvantages of 100% 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

● As with any startup, green-field investments entail higher risks and higher costs associated with building

new factories or manufacturing plants. 

2.2 Internationalization Process

Variations in the organization structure is generally categorized into five stages, viz., domestic company,
international company, multinational company, global company and transnational company.

STAGE - 1: DOMESTIC COMPANY

Domestic company limits its operations, mission and vision to the national political boundaries. This
company focuses its view on the domestic market opportunities, domestic suppliers, domestic financial
companies, domestic customers, etc. These companies analyze the national environment of the country
and formulate the strategies to exploit the opportunities offered by the environment. The domestic
companies’ unstated motto is that, “if it is not happening in the home country, it is not happening”. The
domestic company does not think of growing globally. If it grows, beyond its present capacity, the
company selects the diversification strategy of entering into new domestic markets, new products,
technology, etc. The domestic company does not select the strategy of expansion/ penetrating into the
international markets. Any local Manufacturing company which sells its products across India and also
caters to export market directly from its Indian office can be called a domestic company.

STAGE - 2: INTERNATIONAL COMPANY

Some of the domestic companies, which grow beyond their production and/or domestic marketing
capacities, think of internationalizing their operations. Those companies who decide to exploit the
opportunities outside the domestic country are the stage two companies. These companies remain
ethnocentric or domestic country oriented. These companies believe that the practices adopted in
domestic business, the people and products of domestic business are superior to those of other
countries. The focus of these companies is domestic but extends the wings to the foreign countries.
These companies select the strategy of locating a branch in the foreign markets and extend the same
domestic operations into foreign markets. In other words, these companies extend the domestic
product, domestic price, promotion and other business practices to the foreign markets. Normally,
internationalization process of most of the global companies starts with this stage two processes. Most
of the companies follow this strategy due to limited resources and also to learn from the foreign
markets gradually before becoming a global company without much risk. The international company
holds the marketing mix constantly and extends the operations to new countries. Thus, the international
company extends the domestic country marketing mix and business model and practices to foreign
countries. Haldiram’s Foods International P Ltd, is an example of international company.

STAGE - 3: MULTINATIONAL COMPANY

Sooner or later, the international companies learn that the extension strategy (i.e., extending the
domestic product, price and promotion to foreign markets) will not work. The best example is that
Toyota exported Toyopet cars produced for Japan in Japan to the USA in 1957. Toyopet was not
successful in the USA. Toyota could not sell these cars in the USA as they were overpriced,
underpowered and built like tanks. Thus, these cars were not suitable for the US markets. The unsold
cars were shipped back to Japan. Toyota took this failure as a rich learning experience and as a source of
invaluable intelligence but not as failure. Toyota based on this experience designed new models of cars
suitable for the US market. The international companies turn into multinational companies when they
start responding to the specific needs of the different country markets regarding product, price and
promotion. This stage of multinational company is also referred to as multi-domestic. Multi-domestic
company formulates different strategies for different markets; thus, the orientation shifts from
ethnocentric to polycentric.
Under polycentric orientation, the offices/branches/subsidiaries of a multinational company work like
domestic company in each country where they operate with distinct policies and strategies suitable to
the country concerned. Thus, they operate like a domestic company of the country concerned in each of
their markets. Philips of Netherlands was a multi-domestic company of this stage during 1960s. It used
to have autonomous national organizations and formulate the strategies separately for each country. Its
strategy did work effectively until the Japanese companies like Matsushita started competing with this
company based on global strategy. Global strategy was based on focusing the company resources to
serve the world market. Philips strategy was to work like a domestic company, and produce a number of
models of the product. Consequently, it increased the cost of production and price of the product. But
the Matsushita’s strategy was to give the value, quality, design and low price to the customer. Philips
lost its market share as Matsushita offered more value to the customer. Consequently, Philips changed
its strategy and created “industry main groups” in Netherlands which are responsible for formulating a
global strategy for producing, marketing and R&D.

STAGE - 4: GLOBAL COMPANY

A global company is the one, which has either global marketing strategy or a global strategy. Global
company either produces in home country or in a single country and focuses on marketing these
products globally, or produces the products globally and focuses on marketing these products
domestically. Harley designs and produces super heavy weight motorcycles in the USA and markets in
the global market. Similarly, Dr. Reddy’s Lab designs and produces drugs in India and markets globally.
Thus, Harley and Dr. Reddy’s Lab are examples of global marketing focus. Gap procures products in the
global countries and markets the products through its retail organization in the USA. Thus, Gap is an
example for global sourcing company. Harley Davidson designs and produces in the USA and gains
competitive advantage as Mercedes in Germany. The Gap understands the US consumer and gets
competitive advantage.
STAGE - 5: TRANSNATIONAL COMPANY
Transnational company produces, markets, invests and operates across the world. It is an integrated
global enterprise that links global resources with global markets at profit. There is no pure transnational
corporation. However, most of the transnational companies satisfy many of the characteristics of a
global corporation. For example:, Coca-Cola, Pepsi, etc.
CHARACTERISTICS OF A TRANSNATIONAL COMPANY: The characteristics of a transnational company
include: geocentric orientation, scanning or information acquisition, long-run visions, etc. We discuss
these characteristics in detail. (i) Geocentric Orientation: A transnational company is geocentric in its
orientation. This company thinks globally and acts locally. This company adopts global strategy but
allows value addition to the customer of a domestic country. This company allows adaptation to add
value to its global offer. The assets of a transnational company are distributed throughout the world,
independent and specialized. The R&D facilities of a transnational company are spread in many
countries, but specialized in each country based on the local needs and integrated in world R&D project.
Similarly, the production facilities are spread but specialized and integrated. Units of the transnational
corporation in different countries create and develop the knowledge in all functions and share among
them. Thus, knowledge and experience are shared jointly. Transnational gains power and competitive
advantage by developing and sharing knowledge and experience. Development of dishwashing by using
video camera by the French subsidiary of Colgate and sharing of the knowledge among all Colgate
operating companies across the globe is an example here. (ii) Scanning or Information Acquisition:
Transnational companies collect the data and information worldwide. These companies scan the
environmental information regarding economic environment, political environment, social and cultural
environment and technological environment. These companies collect and scan the information
regardless of geographical and national boundaries. (iii) Vision and Aspirations: The vision and
aspirations of transnational companies are global, global markets, global customers and grow ahead of
other global/transnational companies. (iv) Geographic Scope: The transnational companies scan the
global data and information. By doing so, they analyze the global opportunities regarding the availability
of resources, customers, markets, technology, research and development, etc. Similarly, they also
analyze the global challenges and threats like competition from other global companies, local companies
of host countries, political uncertainties and the like. They formulate global strategy. Thus, the
geographic scope of a transnational company is not limited to certain countries in analyzing
opportunities, threats and formulating strategies. (v) Operating Style: Key operations of a transnational
are globalized. The transnational companies globalize the functions like R&D, product development,
placing key human resources, procurement of high valued material, etc. For example, the R&D activity of
Proctor & Gamble.

2.3 International Business Approaches

International business approaches are similar to the stages of internationalization or globalization. Four
approaches of international business are: 1. Ethnocentric Approach 2. Polycentric Approach 3.
Regiocentric Approach and 4. Geocentric Approach.
1. Ethnocentric Approach: The domestic companies normally formulate their strategies, their
product design and their operations towards the national markets, customers and competitors.
But, the excessive production more than the demand for the product, either due to competition
or due to changes in customer preferences push the company to export the excessive
production to foreign countries. The domestic company continues the exports to the foreign
countries and views the foreign markets as an extension to the domestic markets just like a new
region. The executives at the head office of the company make the decisions relating to exports
and, the marketing personnel of the domestic company monitor the export operations with the
help of an export department. The company exports the same product designed for domestic
markets to foreign countries under this approach. Thus, maintenance of domestic approach
towards international business is called ethnocentric approach. This approach is suitable to the
companies during the early days of internationalization and also to the smaller companies.

2. Polycentric Approach: The domestic companies which are exporting to foreign countries using
the ethnocentric approach find at the later stage that the foreign markets need an altogether
different approach. Then, the company establishes a foreign subsidiary company and
decentralizes all the operations and delegates’ decision-making and policy-making authority to
its executives. In fact, the company appoints executives and personnel including a chief
executive who reports directly to the Managing Director of the company. Company appoints the
key personnel from the home country and all other vacancies are filled by the people of the host
country.
The executives of the subsidiary formulate the policies and strategies, design the product based
on the host country’s environment (culture, customs, laws, government policies, etc.), and the
 preferences of the local customers. Thus, the polycentric approach mostly focuses on the
conditions of the host country in policy formulation, strategy implementation and operations.

3. Regiocentric Approach: The Company after operating successfully in a foreign country thinks of
exporting to the neighboring countries of the host country. At this stage, the foreign subsidiary
considers the regional environment (for example, Asian environment like laws, culture, policies,
etc.), for formulating policies and strategies. However, it markets more or less the same product
designed under polycentric approach in other countries of the region, but with different market
strategies.

4. Geocentric Approach: Under this approach, the entire world is just like a single country for the
company. They select the employees from the entire globe and operate with a number of
subsidiaries. The headquarters coordinate the activities of the subsidiaries. Each subsidiary
functions like an independent and autonomous company in formulating policies, strategies,
product design, human resource policies, operations, etc.

2.4 Case studies Related to internationalization process

1.A 15 years old and reputed furniture manufacturing company in India is getting substantial exports
business since last 5 years. Its export business share is steadily growing at a pace of 6 to 8% every
year. This year company has received almost 30% business from exports, mainly from Latin America.
Suggest them most appropriate modes of entry in order to expand further in global market. Evaluate
the modes selected by you.

Answer:
Since the furniture manufacturing company is 15 years in the business and now their export account in
steadily increasing every year leading to 30% export business share, it is high time that the company
moves to the next mode of international business. Various modes of entry to international business are:
1. Direct Exporting
2. Licensing and Franchising 
3. Contacts and Turn key projects
4. Joint Ventures
5. Strategic Acquisitions 
6. 100% Foreign Direct Investment 

Out of these modes, company is currently practicing “direct exporting mode”. Now they can decide to
move on next modes of entry. The market which they are targeting is Latin America which includes
South American countries along with Mexico. Most of these counties are developing countries and
posies strong brand loyalty to local brands (Ex: Brazil). Considering this fact, company can either start by
licensing manufacturing work to local firm in South America or can provide franchise for outlets
throughout the continent. Franchising mode will not reduce the cost of transportation and the brand
may not be very acceptable to patriotic buyers. Licensing mode has the risk that local manufacturers will
get hold on their market and later on break the contract and manufacture on their own. Hence the best
option will be joint venture. However Licensing can also be an option if company does not have enough
financial strength to start operations in foreign land. Also there is another fact that company already has
some noticeable market in South American continent. Thus Licensing and Joint venture are the two
options which can be utilized by the company.
Licensing:
Companies which want to establish a retail presence in an overseas market with minimal risk,
the licensing and franchising strategy allows another person or business assume the risk on behalf of
the company. In Licensing agreement an host country partner will pay you a royalty or commission to
use your brand name, manufacturing process, products, trademarks and other intellectual properties
and also proportion of their revenues and profits with parent firm.

Advantages of Licensing
● Low cost of entry into an international market
● Licensing partner has knowledge about the local market
● Offers you a passive source of income
● Reduces political risk as in most cases, the licensing partner is a local business entity
● Allows expansion in multiple regions with minimal investment
Disadvantages of Licensing
● In some cases, you might not be able to exercise complete control on its licensing partners in the
overseas market
● Licensees can leverage the acquired knowledge and pose as future competition for your business
● Your business risks tarnishing its brand image and reputation in the overseas and other markets due
to the incompetence of their licensing partners

Joint Venture:
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.
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.
Conclusion: Precise selection of mode of entry depends on some additional knowledge such as financial
strength of the manufacturing company, competence level of local manufacturing companies in South
America, Country in South America which gives highest sales. If it is Brazil, Joint venture will work better
and if it is Mexico, then Licensing will be the better option.

2.What modes of entry in international business are available for a large scale domestic two wheeler
manufacturing company which is targeting following markets?
i)Nepal, the neighbor. India shares Most Favored Nation status with Nepal through SAPTA
ii)China, which has best business infrastructure, large market and cheap labour.
Answer:
Various modes of entry to international business are:
1. Direct Exporting
2. Licensing and Franchising 
3. Contacts and Turn key projects
4. Joint Ventures
5. Strategic Acquisitions 
6. 100% Foreign Direct Investment 

Nepal:
There are several problems with Nepal’s foreign trade: It is a land-locked country competes with India in
high imports and low exports, it produces low quality goods with a high cost of production, capital
formation is inefficient and government policy is not pro-business. Nepal is bordered by India from three
different sides that include an open border policy. As a result, there is a large flow of Indian goods at low
prices. Nepal does not have a well-developed industrial base, therefore, production is of low quality and
it cost more to produce which makes its products non-competitive for the international market place.
Population of Nepal is only 2.8 crore with high poverty index. Thus Nepal itself is not a big market,
neither can it export to other countries being land locked. Thus best mode of entry in Nepal would be
“Direct Exporting”.
Direct exporting involves you directly exporting your goods and products to another overseas market.
For some businesses, it is the fastest mode of entry into the international business.   Direct exporting, in
this case, could also be understood as Direct Sales. In case you foresee a potential demand for your
goods and products in an overseas market, you can opt to supply your goods to an importer instead of
establishing your own retail presence in the overseas market. Then you can market your brand and
products directly or indirectly through your sales representatives or importing distributors.

Advantages of Direct Exporting

● You can select your foreign representatives in the overseas market.
● You can utilize the direct exporting strategy to test your products in international markets before
making a bigger investment in the overseas market.
● This strategy helps you to protect your patents, goodwill, trademarks and other intangible assets.
Disadvantages of Direct Exporting
● For offline products, this strategy will turn out to be a really high cost strategy. Everything has to be
setup by your company from scratch. 
● There is a good amount of lead time that goes into the market research, scoping and hiring of the
representatives in that country.

China
China is the largest and one of the fastest growing consumer markets in the world. India has very good
trade relations with China. China offers best infrastructure for foreign investors in order to attract
Foreign Direct Investments (FDI) and readily allows other countries to set up their manufacturing bases
on its land. China offers attractive tax structure and very professional business atmosphere. However
China now imposes a large number of anti-pollution, safety, local energy supply, and local transport
issue regulations that must be complied with in setting up a new factory. These rules must be complied
with even when the factory will be located in a well established industrial zone. Considering these facts
if the company has good financial strength and looking for a long term business with China and Hong
Kong, best mode of entry would be either a Joint Venture (requires lesser financial strength) or Foreign
Direct Investment (requires larger financial strength).

Joint Venture:
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.
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.
100% Foreign Direct Investment: 
It 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
include mergers and acquisitions or 100% own set up. This strategy is viable 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 100% 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 100% 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

3. What are the various International business approaches? Evaluate the international
business approach for i) an Indian software firm which has sales and development offices
in USA, JAPAN and UK and ii) Unilever plc ( a global FMCG industry having separate
existence in separate countries such as Hindustan Unilever Limited in India.

Answer:
International business approaches are similar to the stages of internationalization or
globalization. Douglas Wind and Pelmutter advocated four approaches of international business.
They are: 1. Ethnocentric Approach 2. Polycentric Approach 3. Regiocentric Approach and 4.
Geocentric Approach.

5. Ethnocentric Approach: The domestic companies normally formulate their strategies,

their product design and their operations towards the national markets, customers and
competitors. But, the excessive production more than the demand for the product, either
due to competition or due to changes in customer preferences push the company to export
the excessive production to foreign countries. The domestic company continues the
exports to the foreign countries and views the foreign markets as an extension to the
domestic markets just like a new region. The executives at the head office of the
company make the decisions relating to exports and, the marketing personnel of the
domestic company monitor the export operations with the help of an export department.
The company exports the same product designed for domestic markets to foreign
countries under this approach. Thus, maintenance of domestic approach towards
international business is called ethnocentric approach. This approach is suitable to the
companies during the early days of internationalization and also to the smaller
companies.

6. Polycentric Approach: The domestic companies which are exporting to foreign

countries using the ethnocentric approach find at the later stage that the foreign markets
need an altogether different approach. Then, the company establishes a foreign
subsidiary company and decentralizes all the operations and delegates decision-making
and policy-making authority to its executives. In fact, the company appoints executives
and personnel including a chief executive who reports directly to the Managing Director
of the company. Company appoints the key personnel from the home country and all
other vacancies are filled by the people of the host country.
The executives of the subsidiary formulate the policies and strategies, design the product
based on the host country’s environment (culture, customs, laws, government policies,
etc.), and the preferences of the local customers. Thus, the polycentric approach mostly
focuses on the conditions of the host country in policy formulation, strategy
implementation and operations.

7. Regiocentric Approach: The Company after operating successfully in a foreign country

thinks of exporting to the neighboring countries of the host country. At this stage, the
foreign subsidiary considers the regional environment (for example, Asian environment
like laws, culture, policies, etc.), for formulating policies and strategies. However, it
markets more or less the same product designed under polycentric approach in other
countries of the region, but with different market strategies.
8. Geocentric Approach: Under this approach, the entire world is just like a single country
for the company. They select the employees from the entire globe and operate with a
number of subsidiaries. The headquarters coordinate the activities of the subsidiaries.
Each subsidiary functions like an independent and autonomous company in formulating
policies, strategies, product design, human resource policies, operations, etc.

i) International business approach of an Indian software firm which has sales and
development offices in USA, JAPAN and UK is Polycentric because company has
decentralized its operations and delegated decision making and policy making
authorities to its branches in USA, Japan and UK.
ii) Unilever Plc operates on the principal of Geocentric Approach because they have
separate organization as individual business entities such as Hindustan Unilever
Limited. These firms like HUL operate as independent and autonomous companies