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Copyright @ Oxford University Press Copyright @ Oxford University Press International Business R. M. JoshiInternational Business R. M. Joshi
Chapter 11: Modes of International Chapter 11: Modes of International Business ExpansionBusiness Expansion
International BusinessInternational Business
Rakesh Mohan Joshi Rakesh Mohan Joshi
Professor & Chairperson, IIFT New DelhiProfessor & Chairperson, IIFT New Delhi
1
Copyright @ Oxford University Press Copyright @ Oxford University Press International Business R. M. JoshiInternational Business R. M. Joshi
Chapter 11: Modes of International Chapter 11: Modes of International Business ExpansionBusiness Expansion
MODES OF MODES OF
INTERNATIONAL INTERNATIONAL
BUSINESS EXPANSIONBUSINESS EXPANSION
Chapter 11
Copyright @ Oxford University Press Copyright @ Oxford University Press International Business R. M. JoshiInternational Business R. M. Joshi
Chapter 11: Modes of International Chapter 11: Modes of International Business ExpansionBusiness Expansion
Learning ObjectivesLearning Objectives
To explain the concept of expansion modes for To explain the concept of expansion modes for international businessinternational business
To examine strategic trade-offs in selecting To examine strategic trade-offs in selecting expansion modesexpansion modes
To discuss trade-related expansion modesTo discuss trade-related expansion modes To evaluate contractual expansion modesTo evaluate contractual expansion modes To elucidate investment modes of expansionTo elucidate investment modes of expansion To explicate strategy for selecting the expansion To explicate strategy for selecting the expansion
modesmodes To elaborate the decision making process for To elaborate the decision making process for
selecting the expansion modesselecting the expansion modes
Copyright @ Oxford University Press Copyright @ Oxford University Press International Business R. M. JoshiInternational Business R. M. Joshi
Chapter 11: Modes of International Chapter 11: Modes of International Business ExpansionBusiness Expansion
Modes of International Business Modes of International Business ExpansionExpansion
These are specific forms of entering a foreign These are specific forms of entering a foreign
country so as to have international presence and country so as to have international presence and
achieve firm’s strategic goals. achieve firm’s strategic goals.
Mode of international business expansion is an Mode of international business expansion is an
institutional mechanism by which a firm expands institutional mechanism by which a firm expands
its operations overseas. its operations overseas.
Modes of expansion have also been referred to as Modes of expansion have also been referred to as
entry modesentry modes in the international business in the international business
literature. literature.
Copyright @ Oxford University Press Copyright @ Oxford University Press International Business R. M. JoshiInternational Business R. M. Joshi
Chapter 11: Modes of International Chapter 11: Modes of International Business ExpansionBusiness Expansion
Factors Affecting Strategic Trade-offs in Factors Affecting Strategic Trade-offs in Selecting an Expansion ModeSelecting an Expansion Mode
Ability and willingness to commit resources in the Ability and willingness to commit resources in the target country target country
Magnitude of risk the firm is willing to take in its Magnitude of risk the firm is willing to take in its international expansioninternational expansion
Types of return anticipated from overseas Types of return anticipated from overseas operationsoperations
Extent of control to be exerted in firm’s foreign Extent of control to be exerted in firm’s foreign operationsoperations
Level of externalisation of firm’s resources Level of externalisation of firm’s resources including its intellectual propertyincluding its intellectual property
Desired flexibility of expansion modesDesired flexibility of expansion modes
Copyright @ Oxford University Press Copyright @ Oxford University Press International Business R. M. JoshiInternational Business R. M. Joshi
Chapter 11: Modes of International Chapter 11: Modes of International Business ExpansionBusiness Expansion
Trade Related ModesTrade Related Modes
Expansion modes that employ some form of Expansion modes that employ some form of
trade to expand business in foreign trade to expand business in foreign
countries.countries.
Trade related modes are low- risk expansion Trade related modes are low- risk expansion
modes, highly suitable for simultaneous modes, highly suitable for simultaneous
expansion in geographically diverse expansion in geographically diverse
countries. countries.
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Chapter 11: Modes of International Chapter 11: Modes of International Business ExpansionBusiness Expansion
ExportsExports
Manufacturing the goods in the home Manufacturing the goods in the home
country or a third country and shipping them country or a third country and shipping them
for sales to a country other than the country for sales to a country other than the country
of production. of production.
Export is the most common initial mode of Export is the most common initial mode of
entry into foreign markets as it involves entry into foreign markets as it involves
much lower risks and is a low cost and much lower risks and is a low cost and
simple mode of entry.simple mode of entry.
Copyright @ Oxford University Press Copyright @ Oxford University Press International Business R. M. JoshiInternational Business R. M. Joshi
Chapter 11: Modes of International Chapter 11: Modes of International Business ExpansionBusiness Expansion
Indirect ExportsIndirect Exports
Selling through an export intermediary Selling through an export intermediary based in its home country and does not based in its home country and does not take care of export activity. take care of export activity.
In indirect exports, the firm is not required In indirect exports, the firm is not required to deal with hassles of export operations, to deal with hassles of export operations, it need little international experience, and it need little international experience, and much less resource commitment.much less resource commitment.
Indirect exports may take place either Indirect exports may take place either through home based agents or through through home based agents or through merchant intermediaries.merchant intermediaries.
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Chapter 11: Modes of International Chapter 11: Modes of International Business ExpansionBusiness Expansion
AgentsAgents
Agents do not take the title of the goods and Agents do not take the title of the goods and operate on behalf of principal firms, rather than operate on behalf of principal firms, rather than themselves on commission basisthemselves on commission basis. .
Types of Export AgentsTypes of Export Agents
Importer’s buying agentsImporter’s buying agents
Country-controlled buying agentsCountry-controlled buying agents
Buying officesBuying offices
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Chapter 11: Modes of International Chapter 11: Modes of International Business ExpansionBusiness Expansion
Merchant IntermediariesMerchant Intermediaries
Exports intermediaries that buy and sell Exports intermediaries that buy and sell
goods for a profit and take title of the goods goods for a profit and take title of the goods
and assume risks thereof. and assume risks thereof.
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Chapter 11: Modes of International Chapter 11: Modes of International Business ExpansionBusiness Expansion
Merchant ExportersMerchant Exporters
They collect produce from several They collect produce from several
manufacturers or producers, export directly manufacturers or producers, export directly
in their own name and work on profit in their own name and work on profit
margins. margins.
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Chapter 11: Modes of International Chapter 11: Modes of International Business ExpansionBusiness Expansion
International Trading CompaniesInternational Trading Companies
Generally large companies that accumulate, Generally large companies that accumulate,
transport, and distribute goods in various transport, and distribute goods in various
markets. markets.
Trading companies have been operating for Trading companies have been operating for
centuries as pioneers of international trade. centuries as pioneers of international trade.
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Chapter 11: Modes of International Chapter 11: Modes of International Business ExpansionBusiness Expansion
Trading/Export HousesTrading/Export Houses
Home-country based firms involved in Home-country based firms involved in
international trading activities that serve as international trading activities that serve as
merchant intermediary for exports. merchant intermediary for exports.
As a part of export development strategies, As a part of export development strategies,
most countries facilitate such most countries facilitate such
trading/exports houses. trading/exports houses.
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Chapter 11: Modes of International Chapter 11: Modes of International Business ExpansionBusiness Expansion
Direct ExportsDirect Exports
Making domestically produced products Making domestically produced products
available in foreign markets without available in foreign markets without
employing any market intermediary in the employing any market intermediary in the
home county. It does not mean that the home county. It does not mean that the
goods are sold directly to foreign-based end goods are sold directly to foreign-based end
customers. customers.
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Chapter 11: Modes of International Chapter 11: Modes of International Business ExpansionBusiness Expansion
Manufacturers’ Export Agents or Sales RepresentativesManufacturers’ Export Agents or Sales Representatives
The individual intermediaries who operate on a The individual intermediaries who operate on a
commission basis and travel frequently to overseas commission basis and travel frequently to overseas
markets and carry out business in the name of the markets and carry out business in the name of the
firm rather than in their own name. firm rather than in their own name.
These agents specialize in one or a few countries These agents specialize in one or a few countries
and offer their services to a number of and offer their services to a number of
manufacturers for non-competing products. manufacturers for non-competing products.
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Chapter 11: Modes of International Chapter 11: Modes of International Business ExpansionBusiness Expansion
Overseas-based Buying AgentsOverseas-based Buying Agents
Foreign based agents that have exclusive Foreign based agents that have exclusive
contract arrangements to perform the contract arrangements to perform the
exporting firm’s business, generally paid on exporting firm’s business, generally paid on
the basis of a specific percentage of profit the basis of a specific percentage of profit
and the cost incurred. and the cost incurred.
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Chapter 11: Modes of International Chapter 11: Modes of International Business ExpansionBusiness Expansion
Merchant importersMerchant importers
An overseas-based trader who imports An overseas-based trader who imports
products and further sells these to a products and further sells these to a
wholesaler or a retailer for a profit. wholesaler or a retailer for a profit.
Merchant importers take possession and Merchant importers take possession and
title of the goods, therefore assuming risks title of the goods, therefore assuming risks
and responsibilities thereof.. and responsibilities thereof..
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Chapter 11: Modes of International Chapter 11: Modes of International Business ExpansionBusiness Expansion
DistributorsDistributors
The overseas distributors purchase the The overseas distributors purchase the
goods and subsequently sell them goods and subsequently sell them
either to a market intermediary or to either to a market intermediary or to
the ultimate customer. The distributors the ultimate customer. The distributors
have contractual agreements with the have contractual agreements with the
exporting manufacturers and deal with exporting manufacturers and deal with
them on a long-term basis. them on a long-term basis.
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Chapter 11: Modes of International Chapter 11: Modes of International Business ExpansionBusiness Expansion
Piggybacking (Complementary Exports)Piggybacking (Complementary Exports)
Use of well-established distribution network Use of well-established distribution network
of another company in foreign country.of another company in foreign country.
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Chapter 11: Modes of International Chapter 11: Modes of International Business ExpansionBusiness Expansion
Counter-TradeCounter-Trade
Various forms of trade arrangements Various forms of trade arrangements
wherein the payment is in form of wherein the payment is in form of
reciprocal commitments for other goods or reciprocal commitments for other goods or
services rather than an exclusive cash services rather than an exclusive cash
transaction. In addition, trade financing transaction. In addition, trade financing
and price-setting are tied together in a and price-setting are tied together in a
single transaction. single transaction.
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Chapter 11: Modes of International Chapter 11: Modes of International Business ExpansionBusiness Expansion
Forms of Counter-TradeForms of Counter-Trade
Simple barter:Simple barter: Direct and simultaneous Direct and simultaneous exchange of goods without use of moneyexchange of goods without use of money. .
Clearing arrangement:Clearing arrangement: The transaction of The transaction of goods and services that extends an agreed period goods and services that extends an agreed period
of time.of time. Switch trading:Switch trading: Trading involving a third party, Trading involving a third party,
known as switch trader in the transaction to known as switch trader in the transaction to facilitate buying of unwanted goods from the facilitate buying of unwanted goods from the importer and make payment by cash or barter to importer and make payment by cash or barter to the exporter. the exporter.
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Chapter 11: Modes of International Chapter 11: Modes of International Business ExpansionBusiness Expansion
Counter purchase:Counter purchase: A deal involving two A deal involving two separate transactions payable in hard currency, separate transactions payable in hard currency, each with its own cash value.each with its own cash value.
Buyback:Buyback: Often used as a marketing tool to sell Often used as a marketing tool to sell plant and equipment wherein the payment is plant and equipment wherein the payment is recovered by way of output from plant and recovered by way of output from plant and equipment sold. equipment sold.
Offset:Offset: Partial payment is made by the importer Partial payment is made by the importer in hard currency, besides promising to source in hard currency, besides promising to source inputs from the importing country and also make inputs from the importing country and also make investment to facilitate production of such goods. investment to facilitate production of such goods.
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Chapter 11: Modes of International Chapter 11: Modes of International Business ExpansionBusiness Expansion
e-Modes of Business Expansione-Modes of Business Expansion
Use of information and communication Use of information and communication
technology for expanding business technology for expanding business
internationally. internationally.
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Chapter 11: Modes of International Chapter 11: Modes of International Business ExpansionBusiness Expansion
Contractual Modes of Business Contractual Modes of Business ExpansionExpansion
Making use of strategic strengths and Making use of strategic strengths and resources of a foreign-based partner resources of a foreign-based partner company for international business company for international business expansion. expansion.
In contractual expansion modes, the partner In contractual expansion modes, the partner firms complement each other with one or firms complement each other with one or more of their strategic strengths, such as more of their strategic strengths, such as superior technology, strong brand equity, superior technology, strong brand equity, manufacturing facilities, well-established manufacturing facilities, well-established distribution network, etc. distribution network, etc.
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Chapter 11: Modes of International Chapter 11: Modes of International Business ExpansionBusiness Expansion
International Strategic AllianceInternational Strategic Alliance
Cooperation with one or more than one firm Cooperation with one or more than one firm
overseas to carry out a business activity overseas to carry out a business activity
wherein each one contributes its different wherein each one contributes its different
capabilities and strengths to the alliance.capabilities and strengths to the alliance.
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Chapter 11: Modes of International Chapter 11: Modes of International Business ExpansionBusiness Expansion
International Contract ManufacturingInternational Contract Manufacturing
A contractual arrangement under which a A contractual arrangement under which a
firm’s manufacturing operations are carried firm’s manufacturing operations are carried
out in foreign countries.out in foreign countries.
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Chapter 11: Modes of International Chapter 11: Modes of International Business ExpansionBusiness Expansion
International Management ContractsInternational Management Contracts
Providing managerial and technical Providing managerial and technical
expertise to an overseas firm on contractual expertise to an overseas firm on contractual
basis. basis.
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Chapter 11: Modes of International Chapter 11: Modes of International Business ExpansionBusiness Expansion
International Turnkey ProjectInternational Turnkey Project
Conceptualizing, designing, constructing, Conceptualizing, designing, constructing,
installing, and carrying out preliminary installing, and carrying out preliminary
testing of manufacturing facilities or testing of manufacturing facilities or
engineering projects at overseas locations engineering projects at overseas locations
for a client organization.for a client organization.
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Chapter 11: Modes of International Chapter 11: Modes of International Business ExpansionBusiness Expansion
International LeasingInternational Leasing
Making available new and used equipment Making available new and used equipment
through a foreign-based firm for use, in through a foreign-based firm for use, in
return of a fee called leasing fee.return of a fee called leasing fee.
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Chapter 11: Modes of International Chapter 11: Modes of International Business ExpansionBusiness Expansion
International LicensingInternational Licensing
Making available intangible assets to a Making available intangible assets to a
foreign company, such as patents, foreign company, such as patents,
trademarks and copyrights, technical know-trademarks and copyrights, technical know-
how and skills (technical guidance, how and skills (technical guidance,
feasibility and product studies, manuals) feasibility and product studies, manuals)
engineering, designs, etc., for a fee termed engineering, designs, etc., for a fee termed
as royalty.as royalty.
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Chapter 11: Modes of International Chapter 11: Modes of International Business ExpansionBusiness Expansion
Major Types of Licensing ArrangementsMajor Types of Licensing Arrangements
Process licensingProcess licensing Trade-mark licensingTrade-mark licensing Cross-licensingCross-licensing
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Chapter 11: Modes of International Chapter 11: Modes of International Business ExpansionBusiness Expansion
International FranchisingInternational Franchising
A special form of licensing in which A special form of licensing in which
intangible assets are transferred to a foreign intangible assets are transferred to a foreign
firm alongwith methods of doing business in firm alongwith methods of doing business in
a prescribed manner and other assistance a prescribed manner and other assistance
over an extended period of time in return for over an extended period of time in return for
a franchising fee.a franchising fee.
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Chapter 11: Modes of International Chapter 11: Modes of International Business ExpansionBusiness Expansion
Investment Modes of Business Investment Modes of Business ExpansionExpansion
If a country is found attractive enough to If a country is found attractive enough to
justify a firm’s long-term commitment, justify a firm’s long-term commitment,
investment modes of expansion are often investment modes of expansion are often
adopted. adopted.
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Chapter 11: Modes of International Chapter 11: Modes of International Business ExpansionBusiness Expansion
Overseas AssemblyOverseas Assembly
Exports of components, parts or machinery Exports of components, parts or machinery
in CKD condition and assembling these parts in CKD condition and assembling these parts
at a site in a foreign country. at a site in a foreign country.
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Chapter 11: Modes of International Chapter 11: Modes of International Business ExpansionBusiness Expansion
International Joint VentureInternational Joint Venture
Equity participation of two or more firms Equity participation of two or more firms
resulting in formation of a new entity. resulting in formation of a new entity.
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Chapter 11: Modes of International Chapter 11: Modes of International Business ExpansionBusiness Expansion
Wholly Owned SubsidiaryWholly Owned Subsidiary
Setting up a fully owned new entity in a Setting up a fully owned new entity in a
foreign country.foreign country.
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Chapter 11: Modes of International Chapter 11: Modes of International Business ExpansionBusiness Expansion
Greenfield OperationsGreenfield Operations
Creating production and marketing facilities Creating production and marketing facilities
on a firm’s own from scratch.on a firm’s own from scratch.
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Chapter 11: Modes of International Chapter 11: Modes of International Business ExpansionBusiness Expansion
Mergers and AcquisitionsMergers and Acquisitions
Transfer of existing assets of a domestic firm to Transfer of existing assets of a domestic firm to
a foreign firm lead to mergers and acquisitions.a foreign firm lead to mergers and acquisitions.
Cross-border mergersCross-border mergers: a new legal entity : a new legal entity
emerges by way of merging assets and emerges by way of merging assets and
operations of firms from more than one country. operations of firms from more than one country.
Cross-border acquisitionCross-border acquisition:: involves involves
transferring management control of assets and transferring management control of assets and
operations of a domestic company to a foreign operations of a domestic company to a foreign
firm. As a result the local firm becomes an firm. As a result the local firm becomes an
affiliate of the foreign company. affiliate of the foreign company.
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Chapter 11: Modes of International Chapter 11: Modes of International Business ExpansionBusiness Expansion
Strategy for Selecting International Strategy for Selecting International Business Expansion ModeBusiness Expansion Mode
Naïve ruleNaïve rule
Pragmatic rulePragmatic rule
Strategy ruleStrategy rule
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Chapter 11: Modes of International Chapter 11: Modes of International Business ExpansionBusiness Expansion
Marketing Strategy and Expansion Marketing Strategy and Expansion ModesModes
Market penetration strategyMarket penetration strategy: : When a When a
firm focuses itself on a select few countries.firm focuses itself on a select few countries.
Market-skimming strategy: Market-skimming strategy: When a firm When a firm
either simultaneously or in quick succession either simultaneously or in quick succession
enters a large number of countriesenters a large number of countries. .
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Chapter 11: Modes of International Chapter 11: Modes of International Business ExpansionBusiness Expansion
Sequential Adoption of Business Sequential Adoption of Business Expansion ModesExpansion Modes
Platform countries: eg. Platform countries: eg. Singapore and Hong Singapore and Hong
KongKong Emerging countries: eg. Emerging countries: eg. Vietnam, Myanmar, Vietnam, Myanmar,
Laos, and CambodiaLaos, and Cambodia Growth countries: eg. Growth countries: eg. China, India, China, India,
Thailand, Indonesia, Malaysia, and Thailand, Indonesia, Malaysia, and
Philippines Philippines Maturing countries: eg. Maturing countries: eg. Korea and TaiwanKorea and Taiwan Established countries: eg. Established countries: eg. JapanJapan
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Chapter 11: Modes of International Chapter 11: Modes of International Business ExpansionBusiness Expansion
Decision-Making Process for Selecting Decision-Making Process for Selecting Modes of International Business Modes of International Business
ExpansionExpansion
The expansion mode strategy should aim The expansion mode strategy should aim
at achieving a firm’s strategic goals. It at achieving a firm’s strategic goals. It
should aim at optimal harnessing of a should aim at optimal harnessing of a
firm’s core competencies by way of firm’s core competencies by way of
international expansion. international expansion.