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In today's economy, most economic boundaries have already disappeared and those remaining
will continue to diminish. This phenomenon is partially due to the proliferation of electronic
communication, which allows instantaneous information transfer for sales, marketing,
manufacturing and outsourcing. Furthermore, growing distribution networks, supply chains, and
transportation hubs simplify the movement of products. And, the broad networks of worldwide
financial institutions reduce currency issues. Thus, businesses operating in the Midwest can
service the needs of customers around the world.
Ultimately, most business professionals will in some way be impacted by international influences.
All individuals planning a career in business must understand the intricacies of doing business
with partners from other countries—whether the business is conducted in the United States or
outside our borders. Culture, language, political systems, geography, and socio-economic factors
all influence a person's business practices. Knowing that you need to research not only the
company you wish to do business with but, also, the culture, tradition, and business practices of
those you will be working with is vital to business success in this global marketplace.
In order to be prepared for a career in any facet of the business world (accounting, finance,
marketing, information technology, law, healthcare, etc.), knowledge and understanding of global
issues is critical. Thus, you should study international business to be prepared for diverse
business opportunities, knowing in advance that respect for and knowledge of your counterparts
can give you a competitive advantage.
Wikipedia
According to C.K. Prahalad & S. Hart,2002, The fortune at the bottom of the pyramid,
Strategy & Business, 26: 54-67, and (2) S.Hart, 2005, Capitalism at the Crossroads (p. 111),
Philadelphia: Wharton School Publishing.
Top Tier: Per capita GDP/GNI > $20,000 Approximately one billion people
Second Tier: Per capita GDP/GNI $2,000-$20,000 Approximately one billion people
Base of the Pyramid Per capita GDP/GNI < $2,000 Approximately four billion people
Modes of ib
The oldest mode of international business is foreign trade. A firm imports its necessary inputs from the
cheapest source, while its exports its output to different countries in order to earn maximum amount of
foreign exchange. In this case, no overseas manufacturing is involved
The other mode of international business is licensing. When a firm lacks capital
and detailed knowledge about a foreign market, it allows its technology, patent,
trade mark and other proprietary advantages to be used for a fee by a licensee
or technology importing firm. As compared to export, this mode requires less
time or depth of involvement in foreign markets. This method is also used when
the host government put restrictions on the inflow of foreign capital investment.
The third mode is known as management contracting. In this mode, the company
sells abroad a particular resource, like management skills. The contract is meant
for a given number of years during which the seller of management skills
manages the affaires of the company located in the host country for a specific
fee.
Joint ventures are the fourth mode. They represent a partnership agreement in
which the venture is owned jointly by the international company and a company
of the host country. Naturally, the joint venture allows the two firms to apply
their respective comparative advantages in a given project. For example
technology and marketing ability of German firms and raw material availability of
Australia firms have led to joint-venture agreements between the two countries.
Cont.........
Finally, an international company invests in the majority equity shares of the company of the host
country. This way, the company in the host country becomes a subsidiary of the international
company. This mode is
better than the acquisition inasmuch as the operations can be tailored exactly to the firm's need and
what is more, the size of the investment is often lower than in case of acquisition. However, the
benefits begin to appear only when the consumer base is firmly established. The importer of goods
has normally to pay for the import in convertible currencies which they buy with their own currency.
Some time money is not the only way to do the business, in other words in exchange of useful good
or raw materials the exchange is done.
When a company innovates a specific technology and its product is mature in the markets abroad or
when the company wants to reap the location advantage in foreign country, it sets up an affiliate
there. Whatever the motivation behind foreign investment or foreign manufacturing, the company
evaluates the cash inflow and outflow during his life of the project and makes investments only
account foreign exchange risk and the political risk involved.
Imports and exports are the most common mode of international business, particularly in smaller
companies even though they are less likely to export. Large companies are more likely to engage in
other modes of
international business in conjunction with importing and exporting. Companies may import and export
merchandise, defined as tangible goods brought into or out of (respectively) a country. While exports
and imports apply mainly to goods, they can also apply to services, or nonproducts.
Most service imports and exports revolve around tourism and transportation. The revenue gained
from international tourism and transportation is best seen in hotels, airlines, travel agencies, and
shipping companies. For many countries, especially in the Caribbean and Southeast Asia, their
income on foreign tourism is more important than their income from exports. The same holds true in
countries such as Norway and Greece, who earn a considerable amount from foreign shipping.
Many companies enter into international licensing agreements, allowing other countries around the
world to use their assets (ie: trademarks, patents, copyrights, or expertise) under contract, receiving
royalty payments in return. Similarly, many companies engage in franchising, a mode of business
where the franchisor allows the franchisee to use a trademark that is an essential part of the
franchisee's business. For example, Gloria Vanderbilt has franchised her name out to several clothing
companies, forming the Gloria Vanderbilt line. The franchisor also assists on a continuing basis in the
operation of the business-for example, by providing components, management services, and
technology.
Companies also pay fees that may be incurred on an international level for engineering services
handled through turnkey operations and management contracts. A turnkey operation involves
construction of facilities,
performed under contract, which is then transferred to the owner when the company is ready to begin
operating. Management contracts are initiated when one company supplies personnel to perform
general or specialized management functions for another company. This is most evident in Disney's
theme parks in France, Japan, and China.
Finally, international business occurs within direct and portfolio investments. By investing in a foreign
company, the investor takes ownership in a foreign property for a financial return. A foreign direct
investment (the more common of the two) gives the investor a controlling interest in the foreign
company. When two or more companies share in an FDI, it is known as a joint venture. When a
government joins a company in an FDI, it becomes a mixed venture. Conversely, a portfolio
investment is a noncontrolling interest in a company that usually involves either taking stock in a
company or making loans to a company in the form of bonds, bills, or notes that the investor
purchases. Portfolio investments are particularly popular with multinational enterprises as they offer a
safe means towards short-term financial gain.
Modes of Entry into International
Markets (Place)
How does an organization enter an overseas market?
Background
A mode of entry into an international market is the channel which your organization employs
to gain entry to a new international market. This lesson considers a number of key
alternatives, but recognizes that alteratives are many and diverse. Here you will be consider
modes of entry into international markets such as the Internet, Exporting, Licensing,
International Agents, International Distributors, Strategic Alliances, Joint Ventures,
Overseas Manufacture and International Sales Subsidiaries. Finally we consider the Stages
of Internationalization.
It is worth noting that not all authorities on international marketing agree as to which mode of
entry sits where. For example, some see franchising as a stand alone mode, whilst others see
franchising as part of licensing. In reality, the most important point is that you consider all
useful modes of entry into international markets - over and above which pigeon-hole it fits
into. If in doubt, always clarify your tutor's preferred view.
The Internet
The Internet is a new channel for some organizations and the sole channel for a large number
of innovative new organizations. The eMarketing space consists of new Internet companies
that have emerged as the Internet has developed, as well as those pre-existing companies that
now employ eMarketing approaches as part of their overall marketing plan. For some
companies the Internet is an additional channel that enhances or replaces their traditional
channel(s). For others the Internet has provided the opportunity for a new online company.
More
Exporting
There are direct and indirect approaches to exporting to other nations. Direct exporting is
straightforward. Essentially the organization makes a commitment to market overseas on its
own behalf. This gives it greater control over its brand and operations overseas, over an
above indirect exporting. On the other hand, if you were to employ a home country agency
(i.e. an exporting company from your country - which handles exporting on your behalf) to
get your product into an overseas market then you would be exporting indirectly. Examples
of indirect exporting include:
• Piggybacking whereby your new product uses the existing distribution and
logistics of another business.
• Export Management Houses (EMHs) that act as a bolt on export
department for your company. They offer a whole range of bespoke or a la
carte services to exporting organizations.
• Consortia are groups of small or medium-sized organizations that group
together to market related, or sometimes unrelated products in
international markets.
• Trading companies were started when some nations decided that they
wished to have overseas colonies. They date back to an imperialist past
that some nations might prefer to forget e.g. the British, French, Spanish
and Portuguese colonies. Today they exist as mainstream businesses that
use traditional business relationships as part of their competitive
advantage.
Licensing
Licensing includes franchising, Turnkey contracts and contract manufacturing.
• Licensing is where your own organization charges a fee and/or royalty for
the use of its technology, brand and/or expertise.
• Franchising involves the organization (franchiser) providing branding,
concepts, expertise, and infact most facets that are needed to operate in
an overseas market, to the franchisee. Management tends to be controlled
by the franchiser. Examples include Dominos Pizza, Coffee Republic and
McDonald's Restaurants.
• Turnkey contracts are major strategies to build large plants. They often
include a the training and development of key employees where skills are
sparse - for example, Toyota's car plant in Adapazari, Turkey. You would
not own the plant once it is handed over.
Internationalization Stages
So having considered the key modes of entry into international markets, we conclude by
considering the Stages of Internationalization. Some companies will never trade overseas and
so do not go through a single stage. Others will start at a later or even final stage. Of course
some will go through each stage as summarized now:
• Indirect exporting or licensing
• Direct exporting via a local distributor
• Your own foreign presences
• Home manufacture, and foreign assembly
• Foreign manufacture
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There are some basic decisions that the firm must take befor forien expansion like: which
-Look in detail at economic and political factors which influence foreign markets.
long-run profit.
Timing of entry:-
1. it’s the ability to prevent rivals and capture demand by establishing a strong brand
name.
2. Ability to build sales volume in that country.so that they can drive them out of market.
3. Ability to create customer relationship.
Disadvantage:
1.firm has to devote effort, time and expense to learning the rules of the country.
2.risk is high for business failure(probability increases if business enters a national
market after several other firms they can learn from other early firms mistakes)
Modes of entry:--
1. Exporting
2. Licensing
3. Franchising
4. Turnkey Project
5. Mergers & Acquisitions:
6. Joint Venture
7. Acquisitions & Mergers
8. Wholly Owned Subsidiary
1.Exporting:
Advantages Of Exporting:
2.Licensing :
In this mode of entry ,the domestic manufacturer leases the right to use
its intellectual property (ie) technology , copy rights ,brand name etc to
a manufacturer in a foreign country for a fee. Here the manufacturer in the
domestic country is called licensor and the manufacturer in the foreign is
called licensee. The cost of entering market through this mode is less
costly. The domestic company can choose any international location and
enjoy the advantages without incurring any obligations and responsibilities
of ownership ,managerial ,investment etc.
Advantages;
1. Low investment on the part of licensor.
2. Low financial risk to the licensor
3. Licensor can investigate the foreign market without much efforts on
his part.
4. Licensee gets the benefits with less investment on research and
development
5. Licensee escapes himself from the risk of product failure.
Disadvantages:
3.Franchising
Advantages:
Disadvantages:
4.Turnkey Project:
Advantages:
1. The company immediately gets the ownership and control over the
acquired firm’s factories, employee, technology ,brand name and
distribution networks.
2. The company can formulate international strategy and generate more
revenues.
3. If the industry already reached the stage of optimum capacity level or
overcapacity level in the host country. This strategy helps the host
country.
Disadvantages:
Two or more firm join together to create a new business entity that is
legally separate and distinct from its parents. It involves shared ownership.
Various environmental factors like social , technological economic and
political encourage the formation of joint ventures. It provides strength in
terms of required capital. Latest technology required human talent etc. and
enable the companies to share the risk in the foreign markets. This act
improves the local image in the host country and also satisfies the
governmental joint venture.
Advantages:
1. Joint venture provide large capital funds suitable for major projects.
2. It spread the risk between or among partners.
3. It provide skills like technical skills, technology, human skills ,
expertise , marketing skills.
4. It make large projects and turn key projects feasible and possible.
5. It synergy due to combined efforts of varied parties.
Disadvantages:
with those of another and henceforth work under a common name and
its parent (or the parent company). The reason for this distinction is that a
lone company cannot be a subsidiary of any organization; only an entity
representing a legal fiction as a separate entity can be a subsidiary. While
individuals have the capacity to act on their own initiative, a business entity
can only act through its directors, officers and employees.
The most common way that control of a subsidiary is achieved is through
the ownership ofshar es in the subsidiary by the parent. These shares give
the parent the necessary votes to determine the composition of the board of
the subsidiary and so exercise control. This gives rise to the common
presumption that 50% plus one share is enough to create a subsidiary. There
are, however, other ways that control can come about and the exact rules
both as to what control is needed and how it is achieved can be complex (see
below). A subsidiary may itself have subsidiaries, and these, in turn, may
have subsidiaries of their own. A parent and all its subsidiaries together are
called a group, although this term can also apply to cooperating companies
and their subsidiaries with varying degrees of shared ownership.
Subsidiaries are separate, distinctlegal entities for the purposes oftaxation
andr egulation. For this reason, they differ fromdivisions, which are
businesses fully integrated within the main company, and not legally or
otherwise distinct from it.
Subsidiaries are a common feature of business life and most if not all major
as more focused companies such asI BM, or Xerox Corporation. These, and
others, organize their businesses into national or functional subsidiaries,
sometimes with multiple levels of subsidiaries.