MODES OF ENTRY INTO INTERNATIONAL BUSINESS - INTERNATIONAL BUSINESS

Notes 6 Pages

Bengaluru City University

Bachelor of Business Administration

Contributed by

Prajwal Hallale

FACULTY NAME: Mrs NALINI.N
COLLEGENAME: MES INSTITUTE OF MANAGEMENT
SUB:INTERNATIONAL BUSINESS

Unit - II

MODES OF ENTRY INTO INTERNATIONAL BUSINESS
Mode of Entry – Exporting – Licensing – Franchising – Contract Manufacturing –
Turn Key Projects – Foreign Direct Investment – Mergers, Acquisitions and Joint
Ventures – Comparison of different modes of Entry.

Modes of entry into an International Business:-
There are some basic decisions that the firm must take before foreign expansion like: which
markets to enter, when to enter those markets, and on what scale.
Which foreign markets? –
The choice based on nation’s long run profit potential.-Look in detail at economic and
political factors which influence foreign markets.-Long run benefits of doing business in a
country depends on following factors:- Size of market (in terms of demographics)- The
present wealth of consumer markets (purchasing power)- Nature of competitionBy
considering such factors firm can rank countries in terms of their attractiveness andlong-run
profit.
Timing of entry:- It is important to consider the timing of entry. Entry is early when an
international business enters a foreign market before other foreign firms, and late when it
enters after other international businesses. The advantage is when firms enters early in the
foreign market commonly known as first-mover advantages
First mover advantage;-
1. it’s the ability to prevent rivals and capture demand by establishing a strong brandname.
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 nationalmarket
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

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1.Exporting
It means the sale abroad of an item produced ,stored or processed in the supplying firm’s
home country. It is a convenient method to increase the sales. Passive exporting occurs when
a firm receives canvassed them. Active exporting conversely results from a strategic decision
to establish proper systems for organizing the export functions and for procuring foreign
sales.
Advantages of Exporting
a. Need for limited finance ;If the company selects a company in the host country to
distribute the company can enter international market with no or less financial resources but
this amount would be quite less compared to that would be necessary under other modes.
b.Less Risks ;Exporting involves less risk as the company understand the culture ,customer
and the market of the host country gradually. Later after understanding the host country the
company can enter on a full scale.
c.Motivation for exporting :Motivation for exporting are proactive and reactive. Proactive
motivations are opportunities available in the host country. Reactive motivators are those
efforts taken by the company to export the product to a foreign country due to the decline in
demand for its product in the home country.

2. Licensing :
In this mode of entry, the domestic manufacturer leases the right to use its intellectual
property 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
1. It reduces market opportunities for both
2. Both parties have to maintain the product quality and promote the product. Therefore one
party can affect the other through their improper acts.
3. Chance for misunderstanding between the parties.
4. Chance for leakages of the trade secrets of the licensor.
5. Licensee may develop his reputation6. Licensee may sell the product outside the agreed
territory and after the expiry of the contract.

3.Franchising
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Under franchising an independent organization called the franchisee operates the business
under the name of another company called the franchisor under this agreement the franchisee
pays a fee to the franchisor.
The franchisor provides the following services to the franchisee.
1. Trade marks
2. Operating System
3. Product reputation
4. Continuous support system like advertising , employee training ,reservation services
quality assurances program etc.
Advantages:
1. Low investment and low risk
2. Franchisor can get the information regarding the market culture, customs and environment
of the host country.
3. Franchisor learns more from the experience of the franchisees.
4. Franchisee get the benefits of R& D with low cost.
5. Franchisee escapes from the risk of product failure.
Disadvantages:
1. It may be more complicating than domestic franchising.
2. It is difficult to control the international franchisee.
3. It reduce the market opportunities for both
4. Both the parties have the responsibilities to maintain product quality and product
promotion.
5. There is a problem of leakage of trade secrets.
4.Turnkey Project :
A turnkey project is a contract under which a firm agrees to fully design , construct and equip
a manufacturing/ business/services facility and turn the project over to the purchase when it is
ready for operation for a remuneration like a fixed price , payment on cost plus basis. This
form of pricing allows the company to shift the risk of inflation enhanced costs to the
purchaser.
Eg nuclear power plants , airports, oil refinery , national highways , railway line etc. Hence
they are multiyear project.

5.Mergers & Acquistions :
A domestic company selects a foreign company and merger itself with foreign company in
order to enter international business. Alternatively the domestic company may purchase the
foreign
company and acquires it ownership and control. It provides immediate access to international
manufacturing facilities and marketing network.
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.
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Disadvantages:
1. Acquiring a firm in a foreign country is a complex task involving bankers, lawyers
regulation, mergers and acquisition specialists fromthe two countries.
2. This strategy adds no capacity to the industry.
3. Sometimes host countries imposed restrictions on acquisition of localcompanies by the
foreign companies.
4. Labour problem of the host country’s companies are also transferred tothe acquired
company.

6.Joint Venture:
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:
1. Conflict may arise
2. Partner delay the decision making once the dispute arises. Then theoperations become
unresponsive and inefficient.
3. Life cycle of a joint venture is hindered by many causes of collapse.
4. Scope for collapse of a joint venture is more due to entry of competitors changes in the
partners strength.
5. The decision making is slowed down in joint ventures due to the involvement of a number
of parties.
7.Acquisitions & Mergers :
A mergers is a voluntary and permanent combination of business whereby one or more firms
integrate their operations and identities with those of another and henceforth work under a
common name and in the interests of the newly formed amalgamations.
Motives for acquisitions
1. Removal of competitor
2. Reduction of the Co failure through spreading risk over a wider range of activities.
3. The desire to acquire business already trading in certain markets & possessing certain
specialist employees &equipments.
4. Obtaining patents, license & intellectual property.
5. Economies of scale possibly made through more extensive operations.
6. Acquisition of land, building & other fixed asset that can be profitably sold off.
7. The ability to control supplies of raw materials.
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8. Expert use of resources.
9. Tax consideration.
10. Desire to become involved with new technologies &management method particularly in
high risk industries.
8. Wholly Owned Subsidiary
Subsidiary means individual body under parent body. This Subsidiary or individual body as
per their own generates revenue. They give their own rent, salary to employees, etc. But
policies and trademark will be implemented from the Parent body. There are no branches
here. Only the certain percentage of the profit will be given to the parent body.
A subsidiary, in business matters, is an entity that is controlled by a bigger and more
powerful entity. The controlled entity is called a company, corporation, or limited liability
company, and the controlling entity is called its parent (or the parent company). The reason
for this distinction is that alone company cannot be a subsidiary of any organization; only an
entity representing affections 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 of shares 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, mayhave 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, distinct legal entities for the purposes of taxation and
regulation. For this reason, they differ from divisions, 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 businesses organize their
operations in this way. Examples include holding companies such as Berkshire Hath away,
Time Warner , or Citi group as well as more focused companies such as IBM, or Xerox
Corporation. These, and others, organize their businesses into national or functional
subsidiaries, sometimes with multiple levels of subsidiaries.
(REFER IB TEXT BOOK FOR FEATURES AND DIFFERENCESBETWEEN
DIFFERENT MODES OF ENTRY)

QUESTIONS
1. Why do firms enter international markets? How do the different kinds of
environmental factors enable the domestic firm to global?
2. How do you evaluate the benefits, costs and risks going global?
3. What is exporting? How do the firms enter international markets through exporting
strategy?
4. What is international licensing? What are the advantages and disadvantages of
international licensing?
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5. What is international franchising? Explain the basic issues involved in franchising and
franchising agreements.
6. How does the contract manufacturing differ from the management contracts?
7. What is a Turnkey project? Explain the advantages and disadvantages of a Turnkey
project.
8. What is foreign direct investment? What are the advantages and disadvantages of
FDI? Also explain different strategies of FDI.
9. What is a joint venture? Why do the firms prefer joint venture to go global?
10. What are the conflicting situations in the alliances? How do you manage
them?

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