Different Modes of entry into
international business
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Different modes of entry
⚫ Exporting
⚫ Licensing
⚫ Franchising
⚫ Contract manufacturing
⚫ Management Contracts
⚫ FDI without alliances
⚫ FDI with alliances
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Forms of Exporting
1
• Indirect Exporting
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• Direct Exporting
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• Intra-corporate Transfers
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Forms of Exporting
⚫Exporting means shipping the goods and services
out of the port of a country.
Seller is referred to as an "exporter" .
Buyer is referred to as an "importer“.
⚫Indirect Exporting means that the firm participates
in international business through an intermediary
and does not deal with foreign customers or
markets.
⚫Direct exporting means that the firm works with
foreign customers or markets with the opportunity
to develop a relationship.
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Indirect Exporting
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Indirect Exporting – Eg.
⚫Exporting of goods and services through
various home-based exporters
⚫Manufacturers’ export agents
⚫Export commission agents
⚫Export merchants
⚫International firms
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Direct Exporting
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Intra-corporate Transfer
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Exporting
Advantages
Relatively low
financial exposure
Permit gradual
market entry
Acquire
knowledge about
local market
Avoid restrictions
on foreign
investment
Disadvantages
Vulnerability to
tariffs and NTBs
Logistical
complexities
Potential conflicts
with distributors
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Licensing
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⚫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

The Licensing Process
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Basic Issues in
International Licensing
⚫Specifying the boundaries of the agreement
⚫Determining compensation
⚫Establishing rights, privileges, and constraints
⚫Specifying the duration of the contract
⚫Differences in laws and culture.
Eg. Pepsico, Coke Bottling Plant
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Licensing –Adv. & Disadv.
• Low financial risks
• Low-cost way to assess
market potential
• Avoid tariffs
restrictions on foreign
investment
• Licensee provides
knowledge of local
markets
Advantages Disadvantages
• Limited market
opportunities/profits
• Dependence on licensee
• Potential conflicts with
licensee
• Possibility of creating
future competitor
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⚫Under franchising, an independent organization 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.
Franchising
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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
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Franchising- Adv. & Disadvantages
Advantages Disadvantages
⚫ Low financial risks
⚫ Low-cost way to assess
market potential
⚫ Avoid tariffs,
restrictions on foreign
investment
⚫ Maintain more control
than with licensing
⚫ Franchisee provides
knowledge of local market
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⚫ Limited market
opportunities/profits
⚫ Dependence on
franchisee
⚫ Potential conflicts with
franchisee
⚫ Possibility of creating
future competitor

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.
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Greenfield Strategy
• Best site
• Modern facilities
• Economic development incentives
• Clean slate
Advantages
• Huge time and patience needed
• Expensive
• Comply with local and national
regulation
• Local workforce needed
• Strongly perceived as a foreign
worker
Disadvantages
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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 company.
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FDI with strategic alliances
Modes of FDI through alliances are:
⚫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.
⚫Joint ventures 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.
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Examples
Merger Acquisition
⚫ING Vysya merged into
Kotak Mahindra
⚫Ranbaxy into Sun
Pharma
⚫Tata Chemicals took
over British salt based
in UK
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⚫Flipkart acquired
Myntra
⚫Yahoo acquired
Bookpad
⚫Asian paints acquired
front end sales of Ess
Ess bathroom Products
⚫ICICI Bank's acquisition
of Bank of Rajas

Acquisition
Advantages Disadvantages
⚫ Obtains control over the
acquired firm such as
factories and brand
names
⚫ Integrate the mgt of the
firm into its overall
international strategy
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⚫Assumes all the
liabilities such as
financial and
managerial

Joint Ventures
Advantages Disadvantages
⚫Benefit from local
partner’s knowledge.
⚫Shared costs/risks
with partner.
⚫Reduced political risk.
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⚫Risk giving control of
technology to partner.
⚫May not realize
experience curve or
location economies.
⚫Shared ownership can
lead to conflict