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Modes of Entry into International Business


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Modes of Entry into International Business

  2. 2. Different modes of entry EXPORTING -indirect exporting -direct exports -intra-corporate transfers   SPECIAL MODES -Contract manufacturing -Management Contracts -Turnkey projects LICENSING   FDI without alliances  FDI with alliances FRANCHISING
  3. 3. Forms of Exporting Indirect exporting Direct exporting Intra-corporated transfer
  4. 4. Forms of Exporting 4  Indirect involvement means that the firm participates in international business through an intermediary and does not deal with foreign customers or markets.  Direct involvement means that the firm works with foreign customers or markets with the opportunity to develop a relationship.
  5. 5. Indirect Exporting
  6. 6. Indirect Exporting – Eg. 16-6  Exporting of goods and services through various home-based exporters  Manufacturers’ export agents  Export commission agents  Export merchants  International firms
  7. 7. Direct Exporting
  8. 8. Intra-corporate Transfer
  9. 9. Exporting Advantages Relatively low financial exposure Permit gradual market entry Disadvantages Vulnerability to tariffs and NTBs Logistical complexities Acquire knowledge about local market Potential conflicts with distributors Avoid restrictions on foreign investment
  10. 10. Licensing  Licensing is when a firm, called the licensor, leases the right to use its intellectual property— technology, work methods, patents, copyrights, brand names, or trademarks—to another firm, called the licensee, in return for a fee.  The property licensed may include: Patents  Trademarks  Copyrights  Technology  Technical know-how  Specific business skills 
  11. 11. The Licensing Process
  12. 12. Basic Issues in International Licensing      Specifying the boundaries of the agreement Determining compensation Establishing rights, privileges, and constraints Specifying the duration of the contract Eg. Pepsico, Coke Bottling Plant
  13. 13. Licensing –Adv. & Disadv. Advantages Disadvantages • Low financial risks • Low-cost way to assess market potential • Avoid tariffs, NTBs, restrictions on foreign investment • Licensee provides knowledge of local markets • Limited market opportunities/profits • Dependence on licensee • Potential conflicts with licensee • Possibility of creating future competitor
  14. 14. Franchising Under franchising, an independent organisation called the franchisee operates the business under the name of another company called the franchisor.  In such an arrangement the franchisee pays a fee to the franchisor.  Franchising is a form of Licensing but the Franchisor can exercise more control over the Franchisee as compared to that in Licensing. 
  15. 15. Franchising Agreements      Franchisee has to pay a fixed amount and royalty based on sales. Franchisee should agree to adhere to follow the franchisor’s requirements Franchisor helps the franchisee in establishing the manufacturing facilities Franchisor allows the franchisee some degree of flexibility. Eg. McDonalds, Subway, KFC
  16. 16. Franchising- Adv. & Disadv. Advantages • Low financial risks • Low-cost way to assess market potential • Avoid tariffs, NTBs, restrictions on foreign investment • Maintain more control than with licensing • Franchisee provides knowledge of local market Disadvantages • Limited market opportunities/profits • Dependence on franchisee • Potential conflicts with franchisee • Possibility of creating future competitor
  17. 17. Specialized Entry Modes
  18. 18. Contract manufacturing    Contract manufacturing is outsourcing entire or part of manufacturing operations. E.g.: pharmaceuticals, Personal Care products etc The iPad and iPhone, which are products from Apple Inc., are manufactured in China by Foxconn. Hence, Foxconn is a contract manufacturer and Apple benefits from a lower cost of manufacturing devices
  19. 19. Contract Manufacturing-Adv. & Disadv. Advantages Disadvantages • Low financial risks • Minimize resources devoted to manufacturing • Focus firm’s resources on other elements of the value chain • Reduced control (may affect quality, delivery schedules, etc.) • Reduce learning potential • Potential public relations problems
  20. 20. Management Contract A management contract is an agreement between two companies whereby one company provides managerial assistance, technical expertise and specialised services to the second company for a certain period of time in return for monetary compensation.  Eg. Schools, sports facilities, hospitals, office buildings, malls and large businesses have on-site cafeterias, restaurants. 
  21. 21. Management Contract Advantages Disadvantages • Focus firm’s resources on its area of contracts • Minimal financial exposure • Potential returns limited by contract expertise • May unintentionally transfer proprietary knowledge and techniques to contractee
  22. 22. Turnkey Project  A turnkey project is a contract under which a firm agrees to fully design, construct and equip a manufacturing/business/service facility and turn the project over to the purchaser when its ready for operation, for a remuneration.
  23. 23. Turnkey Project
  24. 24. FDI without alliances Companies enter the international market through FDI , invest their money, establish manufacturing and marketing facilities through ownership and control. Greenfield strategy- the term Greenfield refers to starting of the operations of a company from scratch in a foreign market.
  25. 25. Greenfield Strategy Advantages Disadvantages • • • • Best site Modern facilities Economic development incentives Clean slate • Huge time and patience needed • Expensive • Comply with local and national regulation • Local workforce needed • Strongly perceived as a foreign worker
  26. 26. FDI with strategic alliances Strategic alliance is a cooperative and collaborative approach to achieve the larger goals. Role of alliances  Many complicated issues are solved through alliances  They provide the parties each other’s strengths  Helps in developing new products with the interaction of 2 or more industries  Meet the challenges of technological revolution.  Managing heavy outlay  Become strong to compete with a multinational
  27. 27. FDI with strategic alliances Modes of FDI through alliances are:  Mergers and acquisitions  Joint ventures
  28. 28. Mergers and Acquisitions Merger : The combining of two or more companies, generally by offering the stockholders of one company securities in the acquiring company in exchange for the surrender of their stock. Acquisition : When one company takes over another and clearly established itself as the new owner, the purchase is called an acquisition. HDFC Bank acquisition of Centurion Bank of Punjab for $2.4 billion
  29. 29. Acquisition Strategy Advantages • Obtains control over the acquired firm such as factories and brand names • Integrate the mgt of the firm into its overall international strategy Disadvantages • Assumes all the liabilities such as financial and managerial
  30. 30. Joint Ventures   A joint venture is an entity formed between two or more parties to undertake economic activity together. The parties agree to create a new entity by both contributing equity, and then they share in the revenues, expenses, and control of the enterprise. Sony-Ericsson is a joint venture by the Japanese consumer electronics company Sony Corporation and the Swedish telecommunications company Ericsson to make mobile phones
  31. 31. Joint Ventures  Advantages:  Benefit from local partner’s knowledge.  Shared costs/risks with partner.  Reduced political risk.  Disadvantages:  Risk giving control of technology to partner.  May not realize experience curve or location economies.  Shared ownership can lead to conflict
  32. 32. THANK YOU