MODES OF ENTRY

EXPORTINGLICENSINGFRANCHISINGSPECIAL MODES-: Contract manufacturing,

Business process outsourcing Management contracts Turnkey projects

FDI WITHOUT ALLIANCES-: Green field strategyFDI WITH ALLIANCES-: Mergers & Acquisitions

Joint Ventures

EXPORTING

Need limited financeLess riskMotivation for exporting:- Reactive motivators- Co. get motivated if

there is decline in the demand for its product in home country then they start exporting the productproactive motivators- Grabbing the opportunities available in the host country.

Exporting contd….

Factors to be considered:-a) Govt. policies like export policies, import

policies, export financing, foreign exchange etc.b) Marketing factors like image, distribution

channels, responsiveness to the customer, customer awareness & customer preferences.

c) Logistical consideration include physical distribution cost, warehousing cost, packaging, transporting, etc.

d) Distribution issues includes own distribution network, networks of host country’s co.

LICENSING (INTERNATIONAL)

In this mode of entry, the domestic manufacturer leases the right to use its intellectual property i.e., technology, work methods, patents(invention), copyrights(authors, composer etc.), brand names, trademarks(symbol, word or design) etc. to a manufacturer in a foreign country for a fee.

Domestic country – licensorForeign country – licensee

LICENSING PROCESS

LICENSOR

LICENSEELICENSEE

LISENSOR

LEASES THE RIGHT TO USE THE INTELLECTUAL PROPERTY

PAYS ROYALTY TO THE LICENSOR FOR USING

INTELLECTUAL PROPERTY

USE INTELLECTUAL PROPERTY TO PRODUCE PRODUTS FOR

SALE IN HIS COUNTRY

RECEIVES ROYALTY MONEY

Basic issues in International licensinga) Boundaries of the agreement:-

company should clearly defined the boundaries of agreements. They determine which rights & privileges are being conveyed in the agreements.

Ex. Pepsi-cola granted license to Heineken of Netherlands with exclusive rights of producing & selling Pepsi-cola in Netherlands. Under this agreement the boundaries are:

(i) Heineken should not export Pepsi-cola to any other country.

(ii) Pepsi supplies concentrated cola syrup & Heineken adds carbonated water to produce beverage &

(iii) Pepsi can grant license to other co. in Netherlands to produce other products of Pepsi.

b) Determination of Royalty:-both parties negotiate for a fair royalty for

both the sides in order to implement the contract more successfully.

c) Determining Rights, privileges & constraints:-it should be clear & specific in order to reduce the hurdles in the implementation of the agreement.

d) Dispute settlement mechanisme) Agreement duration

FRANCHISING (INETRNATIONAL)

It is a form of licensing. The franchisor can exercise more control over the franchised compared to that in licensing.

Under this, an independent orgn called Franchisee operates the business under the name of another company called the Franchisor. The franchisor provides the following services to the franchisee:-

TrademarksOperating systemsProduct reputationsContinuous support system like advertising, employee

training, quality assurance programmes etc.

Basic Issues in Franchising:-The franchisor has been successful in his home country.The franchisor may have the experience in franchising

in home country before going for international franchising.

Franchising Agreements:-It has to pay a fixed amount and royalty based on the

sales to the franchisor.Franchisee should agree to adhere to follow the

franchisor’s requirement like appearance, financial reporting, operating procedures, customer service etc.

Franchisor helps the franchisee in establishing the manufacturing facilities, service facilities, provides expertise, advertising, corporate image etc.

Agreements contd…

Franchisor allows the franchisee some degree of flexibility in order to meet the local taste & preferences.

Ex. McD restaurants in Germany sell beer also & in France wine.

SPECIAL MODES

I. CONTRACT MANUFACTURINGSome company outsource their part of or entire production and concentrate on marketing operations. This practice is called the contract manufacturing/outsourcing.Ex. Nike has contracted with a no. of factories in south-east Asia to produce its athletic foot ware & it concentrates on marketing only.

SPECIAL MODES

II. BUSINESS PROCESS OUTSOURCING (BPO)

SPECIAL MODES

III. MANAGEMENT CONTRACTSThe company with low level technology & managerial expertise may seek the assistance of a foreign co.Then the foreign co. may agree to provide technical assistance & managerial expertise. This agreement between two companies is called the MGMT contracts.

A mgmt contract is an agreement between two co., whereby one co. provides managerial assistance, technical expertise & specialized services to the second co. of the agreement for a certain period of time in return for monetary compensation.

SPECIAL MODES

IV. TURNKEY PROJECTSApproach of T-project is B-O-T (Build, Operate

& Transfer)The company builds the manufacturing/service

facility, operates it for some time and then transfers it to the host country’s govt.

The co. normally approach the host country’s govt. or International Finance corp., EXIM bank etc. for financial assistance as the T-projects require huge finances.

FDI WITHOUT ALLIANCES

Co. which enter the international market through FDI invest their, establish mfg. & marketing facilities through ownership & control.

GREENFIELD STRATEGYG.F. strategy is starting of the operations of a

co. from scratch in foreign market. The co. conducts the mkt survey, selects the location, buys/lease land, creates the new facilities, erects the machinery, transfers the HR & starts the operations & mkg activities.

FDI WITH ALLIANCES

MERGERS

A merger refers to a combination of 2 or more companies into a single company.

Merger is said to occur when 2 or more co. combine into one. It is defined as ‘transaction involving 2 or more Companies in the exchange of securities and only one co. survives’.

When the shareholder of more than one company, usually two, decides to pool the resources of the companies under a common entity, it is called merger.

If as a result of merger, a new company comes into existence it is called amalgamation

andIf one company survives and other lose their independent entity,

it is called absorption.

Ex. Coca-cola entered Indian market instantly by acquiring the Parle & its bottling units.

Toronto Dominion Bank & Canada Trust Bank merged & have become TD Canada Trust.

Ex. Hindustan Computers Ltd. (HCL) and Hewlett-Packard (HP)of USA formed HCL-HP.

Sony-Ericsson - the Japanese consumer electronics co. Sony corp. & the Swedish telecommunications company Ericsson merged to make mobile phones.

Takeover/acquisition

A takeover generally involves the acquisition of a certain block of equity capital of a co. which enables the acquirer to exercise control over the affairs of the co.

The main objective of takeover bid is to obtain legal control of the co.

Take over may be defined as ‘a transaction or series of transactions whereby an individual or group of individuals’.

It is an acquisition of shares carrying voting rights in a co. with a view to gaining control over the assets and management of the co.

Takeover vs merger

Takeover

co. taken over maintains its separate entity.

Merger

Both the co. merge to form single corporate entity & at least one co. loses its identity.

Takeover vs acquisition

Takeover

if the willingness is absent.

Acquisition

If there exists willingness of the co. being acquired.

Kinds of takeover

Friendly takeover: - in this, the acquirer will purchase the controlling shares after through negotiations & agreement with the seller. It is for mutual advantage of acquirer & acquired co.

Hostile takeover: - a person seeking control over a co., purchases the required number of shares from non-controlling shareholders in the open market. This turnover is against the wishes to the target co. management.

Bailout Takeover: - these forms of takeover are resorted to bailout the sick co. to allow the co. for rehabilitation as per the schemes approved by the financial institutions.

JOINT VENTURE It is a form of business combination in which 2

unaffiliated (not associated with each other) business firms contribute financial and/or physical assets as well as personnel , to a new co. formed to engage in some economic activity such as production or marketing of a product.

- A J.V by a domestic co. with MNC can allow the transfer of technology & reaching to global market.

Entering into JV is a part of strategic business policy to diversify & enter into new market, acquire finance, technology, patent & brand names. \

- Most joint ventures are 50:50 partnerships

Joint Ventures

Joint ventures are attractive because: they allow the firm to benefit from a local partner's

knowledge of the host country's competitive conditions, culture, language, political systems, and business systems

the costs and risks of opening a foreign market are shared with the partner

When political considerations make joint ventures the only feasible entry mode

Joint ventures are unattractive because: the firm risks giving control of its technology to its partner the firm may not have the tight control over subsidiaries need

to realize experience curve or location economies shared ownership can lead to conflicts and battles for control

if goals and objectives differ or change over time

Wholly Owned Subsidiaries

In a wholly owned subsidiary, the firm owns 100 percent of the stock

Firms can establish a wholly owned subsidiary in a foreign market:

setting up a new operation in the host country

acquiring an established firm in the host country

Wholly Owned Subsidiaries

Wholly owned subsidiaries are attractive because:they reduce the risk of losing control over core

competenciesthey give a firm the tight control over operations in

different countries that is necessary for engaging in global strategic coordination

they may be required in order to realize location and experience curve economies

Wholly owned subsidiaries are unattractive because:the firm bears the full cost and risk of setting up

overseas operations

Strategic Alliances

Strategic alliances refer to cooperative agreements between potential or actual competitors

Strategic alliances range from formal joint ventures to short-term contractual agreements

The number of strategic alliances has exploded in recent decades

The Advantages Of Strategic Alliances

Strategic alliances:facilitate entry into a foreign marketallow firms to share the fixed costs (and

associated risks) of developing new products or processes

bring together complementary skills and assets that neither partner could easily develop on its own

can help a firm establish technological standards for the industry that will benefit the firm

The Disadvantages Of Strategic Alliances

Strategic alliances can give competitors low-cost routes to new technology and markets, but unless a firm is careful, it can give away more than it receives

Making Alliances Work

The success of an alliance is a function of:partner selectionalliance structure the manner in which the alliance is managed

Making Alliances Work

A good partner:helps the firm achieve its strategic goals and

has the capabilities the firm lacks and that it values

shares the firm’s vision for the purpose of the alliance

is unlikely to try to opportunistically exploit the alliance for its own ends: that it, to expropriate the firm’s technological know-how while giving away little in return

Making Alliances Work

Once a partner has been selected, the alliance should be structured:

to make it difficult to transfer technology not meant to be transferred

with contractual safeguards written into the alliance agreement to guard against the risk of opportunism by a partner

to allow for skills and technology swaps with equitable gains

to minimize the risk of opportunism by an alliance partner

Making Alliances Work

After selecting the partner and structuring the alliance, the alliance must be managed

Successfully managing an alliance requires managers from both companies to build interpersonal relationships

A major determinant of how much a company gains from an alliance is its ability to learn from its alliance partners