International business entry mode

International Business Entry mode
Beyond importing, international expansion is
achieved through exporting, licensing arrangements,
partnering and strategic alliances, acquisitions, and
establishing new, wholly owned subsidiaries, also
known as greenfield ventures, Contract
manufacturing, turnkey projects FDI

Exporting :
 Exporting is a typically the easiest way to enter an
international market, and therefore most firms begin
their international expansion using this model of entry.
Exporting is the sale of products and services in foreign
countries that are sourced from the home country. The
advantage of this mode of entry is that firms avoid the
expense of establishing operations in the new country.
Firms must, however, have a way to distribute and
market their products in the new country, which they
typically do through contractual agreements with a local
company or distributor. When exporting, the firm must
give thought to labeling, packaging, and pricing the
offering appropriately for the market. In terms of
marketing and promotion, the firm will need to let
potential buyers know of its offerings, be it through
advertising, trade shows, or a local sales force.

Exporting : There are two types of
exporting: direct and indirect.
 Direct Exports : Direct exports represent the most
basic mode of exporting made by a (holding)
company, capitalizing on economies of scale in
production concentrated in the home country and
affording better control over distribution. Direct
export works the best if the volumes are small.
Large volumes of export may trigger protectionism.
The main characteristic of direct exports entry
model is that there are no intermediaries.

 Types of Export : Sales representatives :
 Sales representatives represent foreign
suppliers/manufacturers in their local markets for
an established commission on sales. Provide
support services to a manufacturer regarding
local advertising, local sales presentations,
customs clearance formalities, legal
requirements. Manufacturers of highly technical
services or products such as production
machinery, benefit the most from sales
representation.

 Types of Export : Importing distributors:
 Importing distributors purchase product in their own right and
resell it in their local markets to wholesalers, retailers, or
both. Importing distributors are a good market entry strategy
for products that are carried in inventory, such as toys,
appliances, prepared food
 Advantages :
 Control over a selection of foreign markets and choice of
foreign representative company
 Good information feedback from target market, developing
better relationships with the buyers
 Better protection of trademarks, patents, goodwill, and
other intangible property
 Potentially greater sales, and therefore greater profit, than
with indirect exporting

 Export Marketing (Direct ) : Disadvantages :
 Higher start-up costs and higher risks as opposed to
indirect exporting
 Requires higher investments of time, resources and
personnel and also organizational changes
 Greater information requirements
 Longer time-to-market as opposed to indirect exporting.
Indirect exports :
 Indirect export is the process of exporting through
domestically based export intermediaries. The exporter
has no control over its products in the foreign market.

 Indirect exports : Cont…. Types :
 Export trading companies (ETCs)-
 These provide support services of the entire export
process for one or more suppliers. Attractive to
suppliers that are not familiar with exporting as ETCs
usually perform all the necessary work: locate overseas
trading partners, present the product, quote on
specific enquiries, etc.
 Export management companies (EMCs):
 These are similar to ETCs in the way that they usually export for
producers. Unlike ETCs, they rarely take on export credit risks
and carry one type of product, not representing competing ones.
Usually, EMCs trade on behalf of their suppliers as their export
departments.

Indirect exports : Cont…. Types :
 Export merchants :
 Export merchants are wholesale companies that buy
unpackaged products from suppliers/manufacturers for
resale overseas under their own brand names. The
advantage of export merchants is promotion. One of the
disadvantages for using export merchants result in
presence of identical products under different brand
names and pricing on the market, meaning that export
merchant's activities may hinder manufacturer's exporting
efforts.

 Indirect exports : Cont…. Types :
 These are intermediate sellers that work for foreign buyers.
They receive the product requirements from their clients,
negotiate purchases, make delivery, and pay the
suppliers/manufacturers. An opportunity here arises in the fact
that if the client likes the product it may become a trade
representative. A potential disadvantage includes supplier's
unawareness and lack of control over what a confirming house
does with their product.
Nonconforming purchasing agents: These are
similar to confirming houses with the exception that
they do not pay the suppliers directly – payments take
place between a supplier/manufacturer and a foreign
buyer

Advantages of Indirect Exporting :
 Fast market access
 Concentration of resources towards production
 Little or no financial commitment as the clients' exports
usually covers most expenses associated with international
sales.
 Low risk exists for companies who consider their domestic
market to be more important and for companies that are
still developing their R&D, marketing, and sales strategies.
 Export management is outsourced, alleviating pressure
from management team
 No direct handle of export processes.

Disadvantages Indirect Marketing :
 Little or no control over distribution, sales, marketing, etc. as
opposed to direct exporting
 Wrong choice of distributor, and by effect, market, may lead to
inadequate market feedback affecting the international success
of the company
 Potentially lower sales as compared to direct exporting
(although low volume can be a key aspect of successfully
exporting directly). Export partners that incorrectly select a
specific distributor/market may hinder a firm's functional
ability.
 Companies that seriously consider international markets as a
crucial part of their success would likely consider direct
exporting as the market entry tool. Indirect exporting is
preferred by companies who would want to avoid financial risk
as a threat to their other goals.

 Licensing and Franchising :
 The Advantages are : Fast entry, low cost, low risk
 Disadvantages are : Less control, licensee may become a competitor,
legal and regulatory environment and contract law) must be sound
 An international licensing agreement allows foreign firms, either
exclusively or non-exclusively to manufacture a proprietor's product
for a fixed term in a specific market.
 As in this mode of entry the transference of knowledge between the
parental company and the licensee is strongly present, the decision of
making an international license agreement depend on the respect the
host government show for intellectual property and on the ability of
the licensor to choose the right partners and avoid them to compete in
each other market. Licensing is a relatively flexible work agreement
that can be customized to fit the needs and interests of both, licensor
and licensee.

 Licensing and Franchising Continues ……..
 Following are the main advantages and reasons to use an
international licensing for expanding internationally:
 Obtain extra income for technical know-how and services
 Reach new markets not accessible by export from existing
facilities
 Quickly expand without much risk and large capital investment
 Pave the way for future investments in the market
 Retain established markets closed by trade restrictions
 Political risk is minimized as the licensee is usually 100% locally
owned
 Is highly attractive for companies that are new in international
business.

 Licensing and Franchising Continues ……..
Disadvantages :
 Lower income than in other entry modes
 Loss of control of the licensee manufacture and
marketing operations and practices leading to loss of
quality
 Risk of having the trademark and reputation ruined by
an incompetent partner
 The foreign partner can also become a competitor by
selling its production in places where the parental
company is already in.

Franchising : Franchising is based on a marketing
concept which can be adopted by an organization as a
strategy for business expansion. Where implemented, a
franchisor licenses its know-how, procedures, intellectual
property, use of its business model, brand, and rights to sell
its branded products and services to a franchisee. In return
the franchisee pays certain fees and agrees to comply with
certain obligations, typically set out in a Franchise
Agreement.
The word "franchise" is of Anglo-French derivation—from
franc, meaning free—and is used both as a noun and as a
(transitive) verb. For the franchisor, use of a franchise
system is an alternative business growth strategy, compared
to expansion through corporate owned outlets or "chain
stores". Adopting a franchise system business growth
strategy for the sale and distribution of goods and services

Franchising : Cont…….
Franchising is not an equal partnership, especially due to
the preponderance of the franchisor over the franchisee.
But under specific circumstances like transparency,
favourable legal conditions, financial means and proper
market research, franchising can be a vehicle of success for
both franchisor and franchisee.
The franchising system can be defined as: "A system in
which semi-independent business owners (franchisees) pay
fees and royalties to a parent company (franchiser) in
return for the right to become identified with its
trademark, to sell its products or services, and often to use
its business format and system."

Compared to licensing, franchising agreements tends to be
longer and the franchisor offers a broader package of
rights and resources which usually includes: equipment,
managerial systems, operation manual, initial trainings,
site approval and all the support necessary for the
franchisee to run its business in the same way it is done by
the franchisor. In addition to that, while a licensing
agreement involves things such as intellectual property,
trade secrets and others while in franchising it is limited
to trademarks and operating know-how of the business.

Advantages :
Low political risk
Low cost
Allows simultaneous expansion into different regions of
the world
Well selected partners bring financial investment as well
as managerial capabilities to the operation.

Disadvantages of franchising :
Maintaining control over franchisee may be difficult
Conflicts with franchisee are likely, including legal
disputes
Preserving franchisor's image in the foreign market may
be challenging
Requires monitoring and evaluating performance of
franchisees, and providing ongoing assistance
Franchisees may take advantage of acquired knowledge
and become competitors in the future

Turnkey projects :
A turnkey project refers to a project when clients pay
contractors to design and construct new facilities and train
personnel. A turnkey project is a way for a foreign company
to export its process and technology to other countries by
building a plant in that country. Industrial companies that
specialize in complex production technologies normally use
turnkey projects as an entry strategy.
One of the major advantages of turnkey projects is the
possibility for a company to establish a plant and earn profits
in a foreign country especially in which foreign direct
investment opportunities are limited and lack of expertise in
a specific area exists.

Turnkey projects Continu……..
Potential disadvantages of a turnkey project for a company
include risk of revealing companies secrets to rivals, and takeover
of their plant by the host country. Entering a market with a
turnkey project CAN prove that a company has no long-term
interest in the country which can become a disadvantage if the
country proves to be the main market for the output of the
exported process.

Foreign Direct Investment ( FDI) :
Foreign direct investment (FDI) is an investment in the form of a
controlling ownership in a business in one country by an entity based in
another country. It is thus distinguished from a foreign portfolio
investment by a notion of direct control.
Types of FDI:
1. Horizontal FDI arises when a firm duplicates its home country-based
activities at the same value chain stage in a host country through FDI
2. Platform FDI Foreign direct investment from a source country into a
destination country for the purpose of exporting to a third country.
3. Vertical FDI takes place when a firm through FDI moves upstream or
downstream in different value chains i.e., when firms perform value-
adding activities stage by stage in a vertical fashion in a host country

Advantages of FDI
1. It provides local economic benefits in multiple locations.
The companies or individuals that participate in FDI can stimulate community
economic growth on the local level for their headquarters or home. Profits are
often reinvested into workers or increasing organizational opportunities, which
can create new jobs, which then creates new FDI opportunities. The
investments do the same for the home market of the foreign organization as
well.
2 It makes international trade easier to complete.
Many countries have import tariffs that must be paid for goods and services.
Import/Export businesses can struggle to keep products at affordable prices for
customers because of these taxes. Through FDI, it becomes possible to limit or
eliminate these tariffs since a minimum stake in a foreign organization occurs.
That gives the local business more control over the market while maintaining
price competition.

3 Foreign income can increase
Many foreign markets have employees working at wages that would
be considered poverty wages. A majority of the world earns less
than $4 per hour. Some international markets offer less than $1 per
hour. With FDI, foreign income levels can increase. Worker wages
increase. That creates new resources that can help communities to
begin growing.
4 It improves human resources
Businesses are successful because humans have expertise. In the
under-developed and developing world, human skills are limited to
basic labor, agricultural work, and other entry-level skills. Foreign
direct investment creates educational opportunities so that people
can improve their personal skill base. With better skills, higher
wages can be earned. Greater productivity levels are achieved. The
company benefits, as does the individual, and that trickles down to
each community.

5 It allows your money to work harder for you
To encourage FDI, many governments have placed tax incentives on this type
of investment. That makes more money available to work for a foreign
company without disrupting the investing agency’s budget dramatically.
These incentives make it easier to accomplish goals because the money
involved can be directed toward resources instead of government coffers. At
the same time, the gap between cost and revenue is reduced, providing
more opportunities to find profit streams.
6 It provides a foreign company with needed experience
Investors bring more than money to an FDI relationship. They can also
bring their personal experiences within a specific industry. For the
foreign company, such an investment can create an immediate surge
in productivity. Investments can also provide better facilities for the
foreign organization, better equipment assets, and improved vendor
access if contact access from the investor is permitted in the
relationship

7 It creates new opportunities for workers
Workers who are employed by the investing company can travel overseas and
experience new cultures and ideas. That can make them more productive at
home. Foreign workers have better access to the best practices that have been
developed, which helps them to create new opportunities as well. This process
helps both parties grow faster than if they were on their own.
Disadvantages of FDI :
1 Hindrance to Domestic Investment.
As it focuses its resources elsewhere other than the investor’s home country,
foreign direct investment can sometimes hinder domestic investment.
2 Negative Influence on Exchange Rates.
Foreign direct investments can occasionally affect exchange rates to the
advantage of one country and the detriment of another.

4 Higher Costs.
If you invest in some foreign countries, you might notice that it is
more expensive than when you export goods. So, it is very
imperative to prepare sufficient money to set up your operations.
5 Economic Non-Viability.
Considering that foreign direct investments may be capital-
intensive from the point of view of the investor, it can sometimes
be very risky or economically non-viable
6 Expropriation. Remember that political changes can also lead to
expropriation, which is a scenario where the government will have control

7 Negative Impact on the Country’s Investment.
The rules that govern foreign exchange rates and direct
investments might negatively have an impact on the investing
country. Investment may be banned in some foreign markets,
which means that it is impossible to pursue an inviting opportunity.
8 Modern-Day Economic Colonialism.
Many third-world countries, or at least those with history of
colonialism, worry that foreign direct investment would result
in some kind of modern day economic colonialism, which
exposes host countries and leave them vulnerable to foreign
companies’ exploitations.

International business entry mode

International business entry mode

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