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4. Various Forms of International Business

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18 views9 pages

4. Various Forms of International Business

Uploaded by

Shazia Perween
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Various Forms of International Business

Presented By:
Dr. Sayak Gupta, Ph.D
Assistant Professor
Department of Management
Netaji Subhas University
Introduction
 Mode of entry into the International Business refers to the Channel,
which a firm employs in order to gain entry in to the territories of
other Nations and go global.
 There are various factors affecting the decision of the firm to enter
into international business like competition, availability of financial
resources, product life cycle etc. Selection of mode is crucial and is
generally done on the basis of SWOT analysis.
Different Modes of Entry
 Exporting – Exporting is one of the oldest and easiest route to make
an entry in to the foreign market. In exporting, products are produced
domestically and sold in foreign markets. Since exporting does not
involve production in the target countries so no capital investment in
foreign production is required.
1. Direct Exporting – Firms sells the goods to its foreign customers
directly.
2. Indirect Exporting – The product is sold to intermediaries who then
undertake to sell the same in target country.
 Licensing – Licensing is a form of market entry involving two firms,
the licensor and licensee, in which the licensor, agrees to sell to the
licensee, the right to use its intellectual property patents,
trademarks, technology etc for a specific time period in return of
an agreed fee or royalty. The licensor generates income from other
foreign markets avoiding manufacturing and selling efforts. On the
other hand, licensee also benefits as he gets the advantage of existing
company’s know-how in exchange of some fee. For Example: Pepsi
& Coca cola
 Franchising – An Independent Organization called the franchisee
operates the business under the name of another company called
the franchisor for a fee. The manner in which the business is to be
carried out is specified by the franchisor. Support Services like
advertising, training etc are also provided by franchisor. It is very
successful in service Industry. For Example: Dominos, McDonalds
etc.
 Contract Manufacturing – Under this mode, the firm outsources
either or the part of manufacturing operations to a
manufacturing unit in any part of the world, which can produce
the same at very competitive rates. It is generally suitable when a
firm wants to focus more on marketing part than on the
manufacturing process.

 Contract Marketing- Under this mode, the companies, which are


strong in production processes only concentrate and focus on the
production of goods in the home country. In order to enter the
foreign market, these companies outsource the sale of their products
to the other companies in the target countries which have a strong
marketing base.
 Management Contract- It is an agreement between two companies
whereby one company provides managerial assistance, technical
expertise and specialized services to the other companies in
foreign country. In return of this service, the contractor is paid
compensation either in the form of lump sum or certain percentage of
shares in sale of profits.

 Turnkey Projects- Under a turn key project, a company designs,


constructs and test a production facility for its client in other
country. Once the project become fully operational, it is handed over
to the client. All the aspects of the projects are taken care by the
contractor. When the project become fully operational, ‘Key’ is
handed over to the client, Hence the name turnkey.
 Merger and Acquisition – When two entities combine to form a new
entity, it is known as merger. Merger leads to the accumulation of
assets and liabilities of both the entities.
Example: Vodafone Idea Merger and its new identity Vi.
Acquisition takes place when one company is purchased by other
company. It provides the company ready access to a manufacturing
facilities, customers, qualified employee, local management etc.
Example: Tata Motors acquisition of luxury car maker Jaguar
Land Rover
 Joint Venture – Under this, companies by joining hands and sharing
ownership and management with another company enter into a
foreign market. It is most suitable, when firm have the resources to
invest but their exist restriction on trade and direct investment. There
are two types –
1. Contractual Joint Venture – No joint enterprise with a separate
identity is formed. Two or more firms enter into a partnership to
share cost, risk and profits and to complete a common objective or
project.
2. Equity Joint Venture- A new company is formed in which the
foreign and local companies share ownership and control.
Example:
Sony and Ericsson joint venture manufacture Smart Phone.
Sony eventually acquired Ericsson mobile manufacturing
division.
 Foreign Direct Investment- In FDI, the company entering into the
international market makes investments in the other company in
the foreign market. FDI is the direct ownership of facilities in the
target country. It involves transfer of resources, mainly in the form
of capital, to undertake the business activities in the target country.
Direct investment enables the investing company to exercise full
control and significant stake in the operations of company in
foreign country. It leads to optimum utilization of resources in the
host country, creates employment opportunities and leads to overall
development.
 Horizontal, Vertical and Conglomerate are types of FDI’s. Horizontal
is establishing the same type of business in another country.
Example: Mc Donald’s opening restaurant in Japan, while Vertical
is related but different. Example: Mc Donald’s could purchase a
large scale farm in Canada to produce meat for their restaurants
and Conglomerate is an Unrelated business venture. Example:
Walmart, a US retailer may invest in BMW a German
Automobile Manufacturer.

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