Trade Offs

2. Introduction
 One of the most important strategic decisions in
international business is the mode of entering the
foreign market.
 On one extreme, a company may do the
complete manufacturing of the product
domestically and export it to the foreign market.
 On the other extreme, a company may do by
itself, the complete manufacturing of the product
to be marketed in the foreign market there itself.
 There are several alternatives in between these
two extremes.
 The choice of the most suitable alternative is
based on the relevant factors related to the
company and the foreign market.

3. Important foreign market
strategies are a follows:
 Exporting
 Licensing/franchising
 Contract Manufacturing
 Management Contracting
 Fully owned manufacturing facilities.
 Joint ventures
 Third country location
 Mergers and acquisitions

4. Going it Alone: Exporting
HOME COUNTRY HOST COUNTRY
Export of Goods
MNE
(Multi National Enterprise)
Revenues
Customers

5. Going it Alone: Export
Advantages
 Low initial investment
 Reach customers quickly
 Complete control over
production
 Benefit of learning for
future expansion
Disadvantages
 Potential costs of trade
barriers
 Transportation cost
 Tariffs and quotas
 Foregoes potential
location economies
 Difficult to respond to
customer needs well
When Is Export Appropriate?
 Low trade barriers
 Home location has cost advantage
 Customization not crucial

6. In Indian Context
 Several Indian Companies have entered foreign
markets targeting their exports at the ethnic
population.
 Examples:
 Mumbai based American Dry Fruits (ADF) sells its
range of packaged foods like chutneys, spices,
canned vegetables, ready to eat dals to countries
with large Indian Population.
 Several firms in Kerela export processed spices,
rice powder etc.
 Raymonds and Birla VXl have a number of
showrooms in West Asia to sell their range of textie
items.

7. Licensing Agreement
Local Firm
Licensing of Technology
HOME COUNTRY HOST COUNTRY
MNE
Fees and Royalties

8. Licensing Agreement
Advantages
 Low initial investment
 Avoids trade barriers
 Potential for utilizing
location economies
 Access to local
knowledge
 Easier to respond to
customer needs
Disadvantages
 Lack of control over
operations
 Difficulty in transferring tacit
knowledge
 Negotiation of a transfer price
 Monitoring transfer outcome
 Potential for creating a
competitor
When Is Licensing Appropriate?
 Well codified knowledge
 Strong property rights regime
 Location advantage

9. In Indian Context
 A number of foreign companies have entered the
Indian market, both industrial and consumer
goods, by licensing.
 Examples:
 The IFB washing machine, was manufactured in
India, under license from Bosch of Germany.
 In early 2003, US apparel giant Tommy Hilfiger
Corporation entered into a licensing agreement
with the Arvind Group to market the Tommy Hilfiger
brand in India.

10. Franchising
 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 right to use trade
marks, operating System, product reputation
and continuous support system like
advertising, employee training etc.
 There are two major franchising types:
1.Product and trade name franchising.
2. Business format “package” franchising

12. Contract Manufacturing
ADVANTAGES
 Company does not have to
commit resources for
setting up production
facilities.
 Cost of product obtained
by contract manufacturing
is lower than if it were
manufactured by the
international firm.
 It is a less risky way to
start with, if the business
does not sufficiently pick
up, dropping it is easy.
DISADVANTAGES
 Less control over
manufacturing process.
 Has the risk of
developing potential
competitors.
 Not suitable in cases of
high tech products and
cases which involve
technical secrets.
Under contract manufacturing, a company doing international
marketing contracts with firms in foreign countries to manufacture
and assemble the products while retaining the responsibility of
marketing the products.

13. In Indian context
 There are a number of multinationals and affiliates of
multinationals which employ this strategy in India like
Park Davis, Hindustan Lever, Ponds, etc.
 Due to availability of excess capacity with some soap
manufacturers enabled several foreign companies to
experiment with new brand of toile soaps in India.
For example, Godrej soaps manufactured Dettol for
Reckitt and Coleman, Johnson’s Baby Soap for
Johnson and Johnson and Ponds Dreamflower, Cold
cream and Sandlewood for Ponds.

14. Management Contract
Management Fees
Local Firm
Technological Inputs
HOME COUNTRY HOST COUNTRY
Profit
MNE
Wholly-Owned
Subsidiary
Managerial
Service

15. Management Contract
Advantages
 Access to local
management skills
 Avoids buying unwanted
assets
 Retains strategic control
Disadvantages
 Potential incentive
problem
 Potential adverse
selection problem
 How do you know the
competencies of the
manager?
When Is a Management Contract Appropriate?
 Management has a reputation to protect
 Hotels
 Consulting companies
 Performance-based contract provides no perverse
incentives

16. In Indian Context
 Some Indian companies – Tata Tea, Harrisons
Malayalam and AVT- have contracts to manage a
number of plantations in Sri Lanka.

17. Fully owned manufacturing facilities or
“Green Field” Entry
New Subsidiary
Company
Investment
HOME COUNTRY HOST COUNTRY
MNE
Profit

18. Going it Alone: “Green Field” Entry
Advantages
 Normally feasible
 Avoids risk of
overpayment
 Avoids problem of
integration
 Still retains full control
Disadvantages
 Slower startup
 Requires knowledge of
foreign management
 High risk and high
commitment
When Is “Green Field” Entry Appropriate?
 Lack of proper acquisition target
 In-house local expertise
 Embedded competitive advantage

19. In Indian context
 Mercedes Benz has a production facility in Pune,
India and BMW has in Chennai, India.

20. Joint Venture
Joint Venture
Company
Inputs
MNE Local Firm
HOME COUNTRY HOST COUNTRY
Inputs
Share of Profit
Share of
Profit

21. Joint Venture
Advantages
 Access to partner’s local
knowledge
 Reduction of concern about
overpayment
 Both parties have some
performance incentives
 Significant control over
operation
Disadvantages
 Potential loss of
proprietary knowledge
 Potential conflicts
between partners
 Neither partner has full
performance incentive
 Neither partner has full
control
When Is a Joint Venture Appropriate?
 Both partners contribute hard-to-measure inputs
 Large expected mutual gains in the long-run
 Trade secrets can be walled off

22. In indian Context
 Toyota Motor Corporation entered India in 1997 in
a joint venture with the Kirloskar Group.
 Joint venture between Bharti Airtel and Alcatel
Lucent for managing Airtel’s Broadband and
Landline networks.

23. Third Country Location
 Third country location is used as an entry strategy
when there is no commercial transactions between
two nations because of political reasons.
 In such a situation a firm in one of those countries
which wants to enter the other market will have to
operate from the third country.
In Indian Context
 Rank Xerox found it convenient to enter USSR
through its Indian Joint venture Modi Xerox,
because of India’s friendly relations with USSR.

24. Mergers and Acquisitions
 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.

26. In Indian Context
 Foreign MNC’s have been using M&A’ as a
marketing strategy.
 The soft drinks industry witnessed the use of M&A
to increase market Share and shrink Competition.
 The French Cement Major Lafarge has moved on
to strengthen its position by acquiring Raymond’s
cement unit for Rs. 785 Crore.
 A very important foreign acquisition by India has
been the buy out of Tetley by Tata Tea for RS. 1870
Crore.
 Tata Motors acquired Jaguar land Rover in 2008.

27. THANK YOU!