modes-of-international business

Ferdous Mahmud Shaon, Student ID: 12164052 1 | P a g e

TABLE OF CONTENTS

CHAPTER ONE - INTRODUCTION 1.1 BACKGROUND 2 1.2 OBJECTIVES 2 CHAPTER TWO - THEORETICAL ASPECTS 2.1 INTERNATIONAL TRADE EXPORT & IMPORT 3 2.2 LICENSING 4 2.3 FRANCHISING 4 2.4 JOINT VENTURES 5 2.5 ACQUISITIONS 5 2.6 FOREIGN SUBSIDIARIES 5 2.7 FDI IN INTERNATIONAL BUSINESS 6 CHAPTER THREE BANGLADESH PERSEPECTIVE 3.1 INTERNATIONAL BUSINESS MODES USED IN BANGLADESH 7 CHAPTER FOUR - CONCLUDING REMARKS 4.1 CONCLUDING REMARKS 11 REFERENCES 12


CHAPTER 1 - INTRODUCTION BACKGROUND If we spend a day looking around us, the importance of international business will become very obvious. We don't have to look far to see this. For example, if we have a mobile phone or MP3 player, then we can quickly find out at where they were made. What about the computer that was used to prepare this article, or the printer that was used for printing? When we eat, how much of the food we consume was actually produced in Bangladesh? In short, our lives and living standards are heavily influenced by the amount of international business and trades, we conduct with the rest of the world.

Due to remarkable initiatives in regard of financial and trade liberalization over the last three decades, there has been remarkable increase in the volume of international business and trades. In Bangladesh, the policy of trade liberalization & free market economy in the 1980s has created both challenges and opportunities for our economy. Bangladesh continues to suffer from a low-growth, high-poverty syndrome. However, Bangladesh has a large labor force willing to work for low wages resulting in a very competitive position for labor intensive manufacturing exports. It has a large number of entrepreneurial businessmen who are able to develop and run small and medium scale enterprises. With amicable and mutually beneficial regional cooperation, Bangladesh can be an ideal location for huge foreign direct investments, which can serve as a huge market for goods and services in the South Asia. However, the population density of Bangladesh is high and availability of land is limited, which results in a continuing pressure a food supply. For that reason government have to import foods from other countries to fulfill its internal demand. Bangladesh import rate is more than its export rate which constraining the domestic development efforts.

In todays global economy, what is the best way for a company to go global, go beyond its domestic market? What is the safest way? What is the most profitable way? What is the most practical way? These are some of the questions every company has to answer when it makes globalization as its goal. These are also the issues that every company has to tackle when it puts its strategy to enter a new foreign market.

OBJECTIVES x To discuss theoretical aspects of the modes of international business x To learn how companies gradually progress through an internationalization process x To discuss the modes of international business used in Bangladesh


CHAPTER 2 THEORETICAL ASPECTS

Companies use several methods to conduct international business. Among them the followings are the most widely used all over the world:

x International trade Export & Import x Licensing x Franchising x Joint ventures x Acquisitions x Foreign subsidiaries

Foreign market entry modes differ in degree of risk they present, the control and commitment of resources they require and the return on investment they promise. Each method is discussed in turn, with emphasis on its risk and return characteristics.

INTERNATIONAL TRADE EXPORT & IMPORT The first and the most common strategy to be an international company is: import and export of goods, materials and services. Imports consist of transactions in goods and services from non-residents to residents. Imported goods or services are provided to domestic consumers by foreign producers. On the other hand, export means the sale abroad of an item produced, stored or processed in the supplying firms home country. It is a convenient method to increase the sales. There are two types of exporting: direct and indirect. Indirect export means that products are carried abroad by other agents and the firm doesnt have special activity connected with international market, because the sale abroad is treated like the domestic one. For these reasons it is difficult to say that it is an internationalization strategy. In the case of direct exporting, the firm becomes directly involved in marketing its products in foreign markets.

Trading (import & Export) rather than investing abroad is a relatively conservative approach to international business that can be used by firms to penetrate markets (by exporting) or to obtain supplies at a low cost (by importing). The risk is minimal because the firm does not invest any of its capital abroad. If the firm experiences a decline in its exporting or importing, it can normally reduce or discontinue this part of its business at a low cost.


As an entry method, international trading has several advantages. Comparing to other methods, trading is fairly simple and with low costs/investments and risks. Consequently, it is usually the first entry method used by organizations in order to obtain knowledge of the foreign market. On the other hand, the disadvantages of international trading include high transport costs, trade barriers, tariffs, and problems with local agents. In addition, traders have lower control of distribution and local agents, face the risk of exchange rate fluctuations, and are subject to custom duties and taxes in the importing counties.

LICENSING Licensing is a common method of international market entry for companies with a distinctive and legally protected asset, which is a key differentiating element in their marketing offer. It involves a contractual arrangement whereby a company licenses the rights to certain technological know-how, design, patents, trademarks and intellectual property to a foreign company in return for royalties or other kinds of payment. For example, Bangladesh Electrical Industries (BEIL) a subsidiary of Transcom group limited, is a producer of televisions and radios in Bangladesh and is the official licensee of PHILIPS Electronics N.V. Holland.

Here the manufacturer in the domestic country is called licensor and the manufacturer in the foreign country is called licensee. The cost of entering market through this mode is less expensive. The domestic company can choose any international location and enjoy the advantages without incurring any obligations and responsibilities of ownership, managerial, investment etc.

FRANCHISING Under a franchising agreement the franchisor provides a specialized sales or service strategy, support assistance, and possibly an initial investment in the franchise in exchange for periodic fees. For example, KFC, McDonald's, Pizza Hut and Nandoos are franchisors who sell franchises that are owned and managed by local residents in many foreign countries including Bangladesh. The recent relaxation of barriers in foreign countries throughout Eastern Europe and South America has resulted in numerous franchising arrangements.

Franchising is the same as licensing in that the franchiser allows the franchisee to use the trademark or brand or reputation. It different from licensing because, franchisers provide ongoing support to the franchisees including management training, business advice and advertising. Also franchisers have more control over the sales of its products.


JOINT VENTURES Joint venture is a mutual agreement of two or more partners across globe to collectively own the company to produce goods and services. It is a venture that is owned and operated by two or more firms. Many firms penetrate foreign markets by engaging in a joint venture with firms that reside in those markets. In China it is currently a requirement that one of the partners of a joint venture has to be a government owned company. Most joint ventures allow two firms to apply their respective comparative advantages in a given project. For example, General Mills, Inc., joined in a venture with Nestle SA, so that the cereals produced by General Mills could be sold through the overseas sales distribution network established by Nestle.

ACQUISITIONS Firms frequently acquire other firms in foreign countries as a means of penetrating foreign markets. Acquisitions allow firms to have full control over their foreign businesses and to quickly obtain a large portion of foreign market share.

An acquisition of an existing corporation is a quick way to grow. An MNC that grows in this way also partly protects itself from adverse actions from the host government of the acquired company. The MNC has control of a usually well-established firm with good connections to its government. The risk is that too much has been paid for the acquisition, also that there are unforeseen problems with the acquired company. It has to be remembered that the sellers of the company have a thorough knowledge of the business and the price at which they are selling is presumably higher than their estimate. The acquiring company is therefore to a certain extent outguessing the local owners - a risky proposition.

Some firms engage in partial international acquisitions in order to obtain a stake in foreign operations. This requires a smaller investment than full international acquisitions and therefore exposes the firm to less risk. On the other hand, the firm will not have complete control over foreign operations that are only partially acquired.

FOREIGN SUBSIDIARIES Firms can also penetrate foreign markets by establishing new operations in foreign countries to produce and sell their products. Like a foreign acquisition, this method requires a large investment. Establishing new subsidiaries may be preferred to foreign acquisitions because the


operations can be tailored exactly to the firm's needs. Development will be slower, however, in that the firm will not reap any rewards from the investment until the subsidiary is built and a customer base established.

FDI IN INTERNATIONAL BUSINESS The modes of increasing international business extend from the relatively simple approach of international trade to the more complex approach of acquiring foreign firms or establishing new subsidiaries. Any mode of increasing international business, that requires a direct investment in foreign operations, normally is referred to as a Foreign Direct Investment (FDI). International trade and licensing usually are not considered to be FDI because they do not involve direct investment in foreign operations. Franchising and joint ventures tend to require some investment in foreign operations, but to a limited degree. Foreign acquisitions and the establishment of new foreign subsidiaries require substantial investment in foreign operations and represent the largest portion of FDI. Many MNCs use a combination of methods to increase international business. Motorola and IBM, for example, have substantial direct foreign investment, but also derive some of their foreign revenue from various licensing agreements, which require less FDI to generate revenue.


CHAPTER 3 - BANGLADESH PERSPECTIVES

International trade is very important for the economic development of Bangladesh. The country's import needs are large and the imperative to increase exports is immediate. In order to finance those imports and also to reduce the countrys dependence on foreign aid grants, the government, since liberation, has been trying to enhance foreign exchange earnings through planned and increased exports. The significance of foreign trade to the economy is manifest in a number of facts and figures. In 1991-92, foreign trade's contribution to government revenue was around 37%; export-oriented industries' contribution to industrial value-addition was around 56%; export industries' share of employment in the manufacturing sector was about 60%, and the growth of export earnings was 16.09%. During the last decade export earnings at current dollar prices increased by 14% per annum.

The performance of Bangladeshs export sector in recent years is quite impressive especially in the 1990s when we compare it with that of world and SAARC countries. The average annual growth rate of Bangladesh export (11.91%) is higher than those of the world (9.48%) and SAARC countries (10.69%) during 1990-2003. Because of the lower export performance in the 1980s, annual average growth rate of this sector during 1980-2003 is not as impressive compared to other Asian countries and the world, though this sector shows competitiveness compared to other SAARC countries. Over the period of 1980-2003 Bangladeshs exports as a percentage of the worlds exports remain around 0.11% to 0.12% with the exception of 1984, when it was 0.14%, and 1990-1994, when the ratio was around 0.09%. Bangladeshs exports as a percentage of SAARC countries exports show slightly increased trend especially in 2000 and 2001.

For these two years Bangladeshs exports are 11% and 12% of the SAARC countries exports respectively. Bangladeshs share of SAARC countrys exports was the lowest, 7.72%, in 1983.


Bangladeshs exports share in the Asian developing countries, however, shows a decreasing trend in the 1990s compared to the1980s though the ratio is slightly higher in 1998 and 1999 compared to immediate earlier years. The ratio dropped to 0.59% in 2003 from 1.46% in 1980 though it was 0.75% in 2001.

According to the Export Promotion Bureau, Ministry of Commerce, Bangladesh the Product and Region wise exports on FY 2009-10 are as below:

PRODUCT Export% REGION Export%

WOVEN GARMENTS 37.11% EUROPE 52.30% KNITWEAR 40.01% USA 33.30% FROZEN FOOD 2.73% ASIA 8.80% JUTE GOODS 4.86% MIDDLE EAST 2.50% LEATHER 1.40% AFRICA 0.60% AGRICULTURAL PRODUCT 1.50% OCENIA 0.30% ENGG. PRODUCT 1.92% EAST EUROPE 0.30% FOOTWEAR 1.26% OTHERS 1.80% OTHERS 9.21%

Bangladesh government has moved to reduce the number of items on its list of banned imports and has eliminated the need for import licenses. However, some products are still banned from importation, including certain maps, obscene materials, socially or religiously offensive items, all types of wastes, and substandard or rejected goods, as well as all imports from Israel. Despite some recent reductions, tariffs in Bangladesh remain high, averaging over 50%. At the recommendation of the World Bank, Bangladesh has placed a 100% tariff ceiling on most goods, with the intention of bringing the ceiling down to 60%. A value-added tax (VAT) of 10 to 20 percent and additional fees, typically adding up to 15 percent of the cost and freight value, are also applied to imports.

Every year Bangladesh has to Import different types of food & row material to fulfill its internal demand. The Imported commodities of Bangladesh are Machinery and equipment, Chemicals, Iron and steel, Textiles, Foodstuffs, Petroleum products, Cement etc. About 50% of the imports are from the category consumer and intermediate Goods, of which about 80% are intermediate goods (30% petroleum). Consumer goods represent no more than 20% of total imports, partly reflecting a protected consumer domestic market. Capital goods represented one third of imports in FY 2011. While the share of machinery has declined over time, the share of iron and steel and other capital goods has increased in recent years. Even as exports have risen significantly, imports have been rising even faster, resulting in a chronic and widening trade deficit that has been offset by strong remittance inflows from Bangladeshi overseas workers.


Bangladesh depends on Asia for much of its imports. In FY 2010-11, Asias share in its total goods imports was 64.4%, including China (17.6%), India (13.6%), Singapore and Japan (nearly 4% each), and other Asian countries (24%). Imports from the EU and North America combined accounted for only 14.7% of the total value of imports.

Total export earnings during the last four fiscal years increased by 2.79 times to approximately 79 billion US dollar with an average of 20 billion dollar per year. Import payments also witnessed strong growth during the last four years. As compared to the previous four years, total import payments in the latest four years increased by about three-folds to 115.35 billion US dollar with a yearly average of 28.84 billion US dollar. This may have been due to the global economic slowdown and poor infrastructure development particularly in the energy sector. Bangladesh has a long history of maintaining a negative trade balance, importing more goods than it exports.

Year Import (Billion US $ ) Export (Billion US $ ) 2006-07 17.16 12.18 2007-08 20.37 14.11 2008-09 21.44 15.57 2009-10 33.66 16.2 2010-11 35.52 22.92 2011-12 34.81 24.3

Source: Foreign Exchange Policy Department, Bangladesh Bank, CCI&E and EPB

Foreign Direct Investment (FDI) has played a key role in the economic development of Bangladesh for the last 15 years. Bangladesh offers a most liberal FDI regime in South Asia, with no prior approval requirements or limits on equity participation and repatriation of profits and income in most sectors. Bangladesh recorded a rise in foreign direct investment (FDI) last year, bucking a global downturn in cross-border investments. Actual FDI inflows rose 13.75 percent to $1.29 billion in 2012, the highest ever in the history of Bangladesh. Major foreign investors in Bangladesh include Telenor of Norway, Singtel of Singapore, Orascom of Egypt, YKK of Japan and Samsung of Korea.

Foreign remittance is one of the driving forces in the growth of the economy of Bangladesh. In FY 2010-11, there is a large share of remittance that is USD 11,650 million while the trade deficit is USD 7,328 million, service deficit USD 2,398 million and income deficit USD 1,354 million. Current account surplus in FY 2010-11 is only USD 995 million, which is 73.28 per cent less than that of FY 2009-10 while current account surplus was USD 3,724 million. In fiscal year 2010-11, the growth rate of merchandise export and import is 41.74 and 41.84 respectively and at the same time trade deficit has increased at the rate of 42.20%.


Bangladesh does not have any established law about franchising. Besides, there is no separate governing body that regulates these sorts of businesses. So, here the franchisees have to bind with each and every term and conditions set by the franchisor. On the mirror view the franchisor may faces a lot of risks while they permit for franchising here. Often different companies are seemed to contract for everything but violets some major principles set by the franchisor. Sometimes they sacrifices quality, size of the product to earn higher return. Sometimes franchises cares very little about the franchisors reputation. But reputation or brand is one of the most important assets for the franchisors. Currently in Bangladesh, international chain food shops like: KFC, Pizza Hut and Nandoos are franchised by Transcom Foods Limited.

There are some popular joint venture companies in Bangladesh. TM International (Bangladesh) Limited, a joint venture company of Telekom Malaysia Berhad and A.K. Khan & Co. Limited was established in 1997 under the brand name 'Aktel'. Grameenphone, the largest mobile phone operator Bangladesh, is also a joint venture enterprise between Telenor and Grameen Telecom Corporation. Telenor, Norway, currently owns 55.8% shares of Grameenphone, Grameen Telecom owns 34.2% and the remaining 10% is publicly held.

The past decades boom in international business and trade particularly in the apparel sector is very significant to Bangladesh's economic growth, but the recent GDP growth has not led to significant improvements in the living standards of most people and the social factors are still challenging. Despite impressive economic growth and some reforms over the two decades Bangladeshs business environment is still challenging. The key issues are: poor quality infrastructure particularly road networks and electricity supply, non-diversified economy, high levels of corruption, government bureaucracy, political instability and safety risks, large unskilled labor force, inflation etc. Government should take immediate actions to solve these problems in order to make Bangladesh a better place for foreign investment. Otherwise Bangladesh may struggle to achieve its goal of becoming a middle income country by the year 2021 (vision 2021).


CHAPTER 4 CONCLUDING REMARKS

Bangladesh economic growth over the last half decade is more than 6% and it is one of the emerging economies in South Asia. The real export growth is more than 9%, which is higher than all other south Asian countries except India (WTI 2008). Bangladesh launched comprehensive trade reforms in the early 1990s that included substantial reduction of tariffs, removal of quantitative restrictions, and moves from multiple to a unified exchange rate and from a fixed to freely floating exchange rate system to increase its export performance. The garments export industry is allowed duty free import of raw materials. The maximum tariff rate has declined from a high of 300% in the late 1990s to just 25% in 2007 (WTI 2008). The country has liberalized its banking and telecommunication sectors. As a result, export growth has been satisfactory in the last few decades. The major portion of export income comes from RMG sector but major portion of raw materials for RMG sector are imported goods. So there is no positive effect in BOP. To increase export growth even more, the export oriented industries should be diversified and variety should also come. Besides exports, Bangladesh also earns good amount of foreign currency by the means of franchising and joint ventures. FDI and remittance are playing a vital role in the economic growth of Bangladesh. Bangladesh has a great potential for international business activities and foreign investment due to its cheap labor cost and natural resources. Different supportive conditions like stable political situation, no corruption, good quality infrastructure, skilled labor force and developments of other areas can attract foreign investors to invest more in Bangladesh, which will eventually act as a driving force for our economic and social development.


REFERENCES

x Yadong, L. (1999), Entry and Cooperative Strategies in International Business Expansion Age, Greenwood Publishing Group, ISBN 978-1-56720-161-1

x Sherman, A. J. (2004), Franchising & licensing: two powerful ways to grow your business in any economy

x Mohammed Abu Rayhan (2009), Foreign Direct Investment in Bangladesh: Problems and Prospects, ASA University Review, (Vol. 3, No. 2)

x Arif Billah, (2012), Foreign Direct Investment Scenario: Bangladesh Perspective, (Vol. 22, No. 1)

x Dr. Laila Arjuman Ara and M. Masudur Rahman, The Competitiveness and Future Challenges of Bangladesh in International Trade

x Trading Economics, Bangladesh exports and imports, access on 1 August 2013 x Abu Sayeed Chowdhury, Deputy Secretary, Ministry of Public Administration, A Handbook

for Export from Bangladesh x Official website of Board of Investment (BOI) Bangladesh, Prime Minister's Office -

www.boi.gov.bd x Official website of Bangladesh Bank - www.bb.org.bd x Official website of Bangladesh Bureau of Statistics - www.bbs.gov.bd x Official website of Ministry of Commerce Bangladesh - www.mincom.gov.bd

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