INTERNATIONAL BUSINESS

MANAGEMENT

UNIT-II
Modes of entering
international business

PRESENTED BY:
Dr. R.V.RAO
 DECISION OF MODES OF
ENTRY
To decide the mode of entry the following
factor is to be considered :-

1. Ownership advantages
2. Location advantages
3. Internationalization Advantages
 1.OWNERSHIP
ADVANTAGES
 Ownership advantages are those
benefits that the company may
have by owning the resources.

 TISCO Ltd. Owned its iron ore mines and

collieries. This advantage makes it the
least cost producer of molten iron.
 2. LOCATION
ADVANTAGE
 Certain location factors grant benefit to
the company when the manufacturing
facilities are located in the host country.
• Customer needs , preferences and tastes
• Logistic requirements
• Cheap land and acquisition costs
• Political stability
• Cheap labour
• Low cost of raw materials
• Climatic Conditions.
INTERNATIONALISATION
ADVANTAGES
 Internationalisation advantages are those
benefits that a company gets by
manufacturing goods or rendering services in
the host country by itself rather than through
contract arrangements with the companies in
the host countries.

Ex: Toyota enters foreign markets through direct

investments and joint ventures as the local
companies in foreign countries cannot
produce as efficiently as Toyota.
 DIFFERENT MODES OF
ENTRY
 EXPORTING
-indirect exporting
-direct exports
-intra-corporate transfers
 LICENSING-

International Licensing
 FRANCHISING
- International Franchising
 SPECIAL MODES

-Contract manufacturing
-BPO
-Management Contracts
-Turnkey projects
 FDI without alliances
 FDI with alliances
 EXPORTING
Advantages :-
• Need for limited finance
• Less risk
• Motivation for exporting

Forms of exporting :-
• Indirect exporting
• Direct exporting
• Intra corporate transfers
 REASONS FOR EXPORTING
1. The volume of foreign business is not large
enough to justify overseas production.
2. Cost of production in the foreign market is high
3. The foreign market is characterized by
production bottlenecks like infrastructural
problems, problems with materials supplies etc.
4. There are political or other risks of investment in
the foreign country.
5. The company has no permanent interest in the
foreign market concerned or that there is no
guarantee of the market available for a long
period.
6. Foreign investment is not favoured by the
foreign country concerned.
7. Licensing or contract manufacturing is not a
better alternative.
FACTORS TO BE
CONSIDERED
 Government policies
 Marketing factors
 Logistics consideration
 Distribution issues
 LICENSING

In this mode of entry, the domestic

manufacturer leases the right to use its
intellectual property, i.e., technology,
work methods, patents, copy rights, brand
names, trade marks etc. to a
manufacturer in a foreign country for a
fee.
BASIC ISSUES
 Boundaries of the agreement
 Determination of Royalty
 Determining rights, privileges and
constraints
 Dispute settlement Mechanism
 Agreement Duration
 LICENSING:
Advantages
1. Low investment on the part of licensor.
2. Low financial risk to the licensor
3. Licensor can investigate the foreign
market without many efforts on his
part.
4. Licensee gets the benefits with less
investment on research and
development
5. Licensee escapes himself from the risk
of product failure.
 LICENSING :
Disadvantages:
1. It reduces market opportunities for both
2. Both parties have to maintain the product quality
and promote the product. Therefore one
party can affect
the other through their improper acts.
3. Chance for misunderstanding between the
parties.
4. Chance for leakages of the trade secrets of the
licensor.
5. Licensee may develop his reputation
6. Licensee may sell the product outside the agreed
territory and after the expiry of the contract.
 FRANCHISING
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 AGREEMENTS
1. Franchisee has to pay a fixed
amount and royalty based on sales.
2. Franchisee should agree to adhere
to follow the franchisor’s
requirements
3. Franchisor helps the franchisee in
establishing the manufacturing
facilities
4. Franchisor allows the franchisee
some degree of flexibility.
 CONTRACT
MANUFACTURING
Contract manufacturing is outsourcing
entire or part of manufacturing
operations
E.g.: pharmaceuticals, textiles etc
 ADVANTAGES
1. It can focus on the part of the value chain
where it has distinctive competence.
2. It reduces the cost of production as the
host country’s companies with their
relative cost advantages produce at low
cost.
3. Small and medium industrial units in the
host country can also develop as most of
the production activities take in these
units.
4. The international company gets the
locational advantages generated by the
host country’s production.
 DISADVANTAGES:
1. Host countries may take up the marketing
also, hindering the interest of the
international company.

2. Host country’s companies may not strictly

adhere to the production design quality
standard etc.

3. The poor working conditions in the host

country’s companies affect the company’s
image.
 BPO
(BUSINESS PROCESS OUTSOURCING)
 Business Process Outsourcing is the
long term contracting out of non core
business processes to an outside
provider to help achieve increased
shareholder value.
WHY BPO
• To enable executives to concentrate
on strategy.
• To improve processes and save
money
• Increase organisational capabilities.
MANAGEMENT CONTRACT
A management contract is an
agreement between two companies
whereby one company provides
managerial assistance, technical
expertise and specialized services
to the second company for a certain
period of time in return for
monetary compensation.
.
 Advantages:
1. Foreign company earns additional income without any
additional investment, risk and obligations.
2. This arrangement and additional income allows the
company to enhance its image among the investors and
mobilize the funds for expansion.
3. It helps the companies to enter other business areas in the
host country.
4. The companies can act as dealer for the business of the
host country’s business in the home country.

 Disadvantages:
1. Sometimes the companies allow the companies in the host
country even to use their trademarks and brand name. The
host country’s companies spoil the brand name if they do
not keep up the quality of product services.
2. The host country companies may leak the secrets of
technology.
 TURNKEY PROJECT
 A turnkey project is a contract under
which a firm agrees to fully design,
construct and equip a manufacturing/
business/services facility and turn the
project over to the purchase when it is
ready for operation for remuneration like
a fixed price, payment on cost plus basis.
 This form of pricing allows the company to shift
the risk of inflation enhanced costs to the
purchaser.
 Eg nuclear power plants, airports, oil
refinery, national highways, railway line
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.
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
 Mergers and Acquisitions

What Does Merger Mean?

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.
Pixar-Disney Merger

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
 Joint Ventures

 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
 FUNCTIONAL ALLIANCES
 PRODUCTION ALLIANCES
 MARKETING ALLIANCES
 FINANCIAL ALLIANCES
 RESEARCH AND DEVELOPMENT ALLIANCES

BREAKING UP OF ALLIANCES
 Incompatibility of partners
 Access to information
 Distribution of income
 Changes in business environment
 Acquiring the strengths of the partner
 Legal factors
 THE END

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