MODES OF ENTERING

INTERNATIONAL BUSINESS

DECISION OF MODES OF ENTRYTo decide the mode of entry the following

factor is to be considered :- Ownership advantages Location advantages Internationalization Advantages

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.

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.

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

EXPORTINGAdvantages :-• Need for limited finance• Less risk• Motivation for exportingForms of exporting :-• Indirect exporting• Direct exporting• Intra corporate transfers

FACTORS TO BE CONSIDERED Government policies Marketing factors Logistics consideration Distribution issues

EXPORT INTERMEDIARIES Export management companies Co-operative societies International trading company Manufacturers’ agents Export and import brokers Freight forwarders

LICENSINGIn 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 Reduces development costs and risks of

establishing foreign enterprise. Lack capital for venture. Unfamiliar or politically volatile market. Overcomes restrictive entry barriers Others can develop business applications of intangible property.

Licensing agreements reduce the market opportunities

One party can effect the other through improper acts.

Costly and tedious litigation may crop up.

Problem of leakage of the trade secrets of the licensor.

FRANCHISINGUnder 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 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.

CONTRACT MANUFACTURIN

G

Contract manufacturing is outsourcing entire or part of

manufacturing operations

CONTRACT MANUFACTURINGContract manufacturing is outsourcing

entire or part of manufacturing operations.

E.g.: pharmaceuticals, textiles etc

BPO 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 specialised services to the second company for a certain period of time in return for monetary compensation.

TURNKEY PROJECT

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.

FDI WITHOUT ALLIANCESCompanies 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 ALLIANCESStrategic 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