unit 1 3 types and forms of international business

INTERNATIONAL BUSINESS MANAGEMENT

04/08/23 a.velsamy, sona school of management 1

TYPES & FORMS


Learning Objectives

Explain the international market entry methods

Discuss the debate on whether being a market pioneer or a fast follower is most useful

Discuss channel members available to companies that export or manufacture overseas


Types of Foreign Market Entry Strategies

1. International transactions that involve the exchange of products: Home based international trade activities such as global sourcing, exporting, and countertrade.

2. Equity or ownership-based international business activities: Include FDI and equity-based collaborative ventures.

3. Contractual relationships: Include licensing and franchising, strategic alliance, contract manufacturing


Types of Foreign Market Entry Strategies

1. Exporting – Direct and indirect. 2. Contractual – 1. Licensing / Franchising 2.

Strategic alliance 3. Contract manufacturing3. M&A4. Production / Assembly facility in foreign

market – 1. Assembly operation 2. Wholly owned manufacturing 3. JVs’

• TYPES / MODES OF INTERNATIONAL BUSINESS• Internal strategies: Using your own assets• 1. Exporting• 2. Licensing• 3. Contract manufacturing• 4. Franchising• 5. Management contracting• 6. Turnkey contracts • 7. Joint Ventures• 8. Third country location• 9. Sales Office• 10. Production Plant• 11. Full Scale Subsidiaries• 12. Turnkey contracts

• External strategies: Combining you and your partners‘ assets• Corporate Networks• Mergers and acquisition• Strategic Alliances ( International Management )

100

Domestic [%]

Foreign [%]0 100

1. Export

2. Licensing

3. Franchising

4. Joint Venture & Strategic Alliances

5. Sales Office

6. Production Plant

7. Full Scale Subsidiary

8. Turnkey Contract


Factors Relevant to Choice of Foreign Market Entry Strategy

1. The goals and objectives of the firm, such as desired profitability, market share, or competitive positioning;

2. The firm’s financial, organizational, and technological resources and capabilities;

3. Unique conditions in the target country, such as legal, cultural, and economic circumstances, as well as distribution and transportation systems;

4. Risks inherent in each proposed foreign venture;5. The nature and extent of competition from existing and

potential rivals;6. The characteristics of the product or service to be offered

to customers in the market (e.g., glass, yogurt, tires, copy machines)

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Pioneers vs. Fast Followers• Pioneers

– Can gain and maintain competitive edge in new market

– Overall pioneers may not perform as well in the long run as followers

• Most successful when– High entry barriers exist– Firm has sufficient size,

resources, and competencies

• Followers– Many become followers by

default– May be advantage to let

pioneer take initial risks

• Most successful when– Few legal, technological,

cultural, or financial barriers– Sufficient resources or

competencies to overwhelm the pioneer’s early advantage

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Direct Exporting

• Exporting of goods and services by the producing firm

• Sales company option• Business established to market goods and services

• Internet has made direct exporting much easier• Cost of trial low

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Indirect Exporting

• Exporting of goods and services through various home-based exporters– Manufacturers’ export agents

• sell for manufacturer

– Export commission agents • buy for overseas customers

– Export merchants • purchase and sell for own accounts

– International firms • use the goods overseas

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Indirect Exporting, cont’d.

• Disadvantages– Commission to export agents, commission agents,

export merchants

– Foreign business can be lost if exporters decide to change their sources and supply

– Firm gains little experience from transactions


Advantages of Exporting

• Increase sales and profits• Increase economies of scale• Diversify customer base, reducing dependence on

the home market • Stabilize fluctuations in sales associated with

economic cycles or seasonality • Low cost entry strategy• Minimal risk • Maximal flexibility• Develop useful foreign relationships


Disadvantages of Exporting

• Requires firm to acquire new capabilities and redirect organizational resources

• Sensitive to tariffs and other trade barriers

• Sensitive to exchange rate fluctuations

• Compared to FDI, firm has fewer opportunities to learn about customers, competitors, and the marketplace

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Licensing

• Licensing– A contractual arrangement: one firm sells access to its patents, trade

secrets, or technology to another – Licensee pays fixed sum and sales royalties (2%-5%)

• Popular because– Courts have begun upholding patent infringement claims– Patent holders have become vigilant in suing violators– Foreign governments have been pressed to enforce their patent

laws

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Franchising

• Franchising

– Form of licensing in which one firm contracts with another to operate a certain type of business under an established name according to specific rules

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Contracts

• Management Contract– Arrangement by which one firm provides management in

all or specific areas to another firm

• Contract Manufacturing– Arrangement in which one firm contracts with another to

produce products to its specifications but assumes responsibility for marketing

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Equity-Based Modes of Entry

• Wholly Owned Subsidiary

• Joint Venture

• Strategic Alliance

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Wholly Owned Subsidiary

• Wholly Owned Subsidiary

• build a new plant (greenfield investment)

• acquire a going concern

• purchase distributor, to obtain a distribution network familiar with products

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Joint Venture

• Joint Venture– Cooperative effort among two or more organizations that

share common interest in business enterprise• corporate entity formed by international company and local

owners• corporate entity formed by two international companies for the

purpose of doing business in a third market • a corporate entity formed by a government

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Joint Venture, cont’d.

• Disadvantages– Profits shared– If law allows no more than 49% foreign ownership, lose

control– Control with minority ownership is possible if

• Take 49% of shares and give 2% to local law firm or trusted national

• Take in local majority partner (sleeping partner)• Management contract

– Can enable the global partner to control many aspects of a joint venture even when holding only a minority position

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Strategic Alliances

• Partnerships between competitor, customers, or suppliers that may take various forms

• Aims to achieve– Faster market entry and start-up– Access to new • Products• Technologies• Markets

– Cost-savings by sharing• Costs• Resources• Risks

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Strategic Alliances, cont’d.

• May be Joint Ventures

• Pooling alliances driven by

similarity and integration

• Trading alliances driven by

contribution of dissimilar

resources

• Alternatives to mergers and

acquisitions

• Future of Alliances– Many fail or are taken

over by a partner– Difficult to manage

• Different strategies• Different operating practices• Different organizational cultures

– Allow partner to acquire technological or other competencies

– Regardless, will continue to be important strategic tool

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International Channels of Distribution


Form What's sold What's received Pro's Con's

Exporting physical productsales price (or countertrade)

1) the only changes from domestic operations entail foreign marketing and documentation; 2) little investment -- typically no investment abroad

1) susceptibility to trade barriers; 2) logistical difficulties; 3) less suitable for service products 4) susceptibility to exchange-rate fluctuation

Licensingtechnical info, assistance, and/or use rights

licensing fee, and commitment to use the info or rights

1) increases return on investments in technology, creativity, or customer relations; 2) little additional capital or time investment

1) the agreement generally prohibits the originating firm from exploiting the assets in particular foreign markets; 2) quality control

Franchising

trademark, on-going service, some inputs, shared marketing expense

payment for trademark; payment for inputs used; share of operating revenues or profits

1) important way of gaining foreign returns on certain kinds of customer-service and tradename assets; 2) some control over the conditions of sale in the foreign market; 3) limited financial commitment

quality control


Management Contracts

people, for a period of time

salary, benefits, and indirect costs; share of operating revenues or profits

1) contractor puts up no capital and bears no risk; 2) useful in foreign contexts that prohibit (or are too risky for) FDI

contractee will become a competitor, at least in the local market

Turnkey Operationdesign, construction, and equipping of a production facility

all costs plus fees; assumption of ownership and risk at end of project

1) contractor bears no risk; 2) useful in foreign contexts that prohibit (or are too risky for) FDI

contractee will become a competitor, at least in the local market

Contract Arrangements

expertise, financing, materials, or finished product

inputs available in the foreign country

avoids currency controls and foreign-exchange risk

may be difficult to negotiate a fair arrangement


Foreign Direct Investment

capital, management, technology; perhaps key material inputs

repatriated profit; licensing fees; transfer payments for inputs

1) control; 2) profit; 3) possibility of tax avoidance through transfer pricing

capital and operating commitment

-- joint ownership

see above see above

1) smaller investment; 2) local marketing and production/ procurement expertise from local partner

less control over the operation

-- sole ownership

see above see abovetotal control and returns

1) larger commitment; 2) perceived as a competitor by local producers (if any); 3) risk of national expropriation

See you again
