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
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2
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• Indirect Exporting
• Direct Exporting
• Intra-corporate Transfers
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
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Disadvantages
Vulnerability to
tariffs and NTBs
Logistical
complexities
Potential conflicts
with distributors
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
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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.
Advantages
• Low financial risks
• Low-cost way to assess
market potential
• Avoid tariffs
restrictions on foreign
investment
• Licensee provides
knowledge of local
markets
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Disadvantages
• Limited market
opportunities/profits
• Dependence on licensee
• Potential conflicts with
licensee
• Possibility of creating
future competitor
Franchising
⚫ 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.
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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
⚫ Low financial risks
⚫ Limited market
⚫ Low-cost way to assess
opportunities/profits
⚫ Dependence on
franchisee
⚫ Potential conflicts with
franchisee
⚫ Possibility of creating
future competitor
market potential
⚫ Avoid tariffs,
restrictions on foreign
investment
⚫ Maintain more control
than with licensing
⚫ Franchisee provides
knowledge of local market
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Disadvantages
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
Advantages
Disadvantages
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•
•
•
•
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
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
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revenues, expenses, and control of the enterprise.
Examples
Merger
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Acquisition
⚫ ING Vysya merged into
⚫ Flipkart acquired
Kotak Mahindra
⚫ Ranbaxy into Sun
Pharma
⚫ Tata Chemicals took
over British salt based
in UK
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
⚫ 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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Disadvantages
⚫ Assumes all the
liabilities such as
financial and
managerial
Joint Ventures
Advantages
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Disadvantages
⚫Benefit from local
⚫Risk giving control of
partner’s knowledge.
⚫Shared costs/risks
with partner.
⚫Reduced political risk.
technology to partner.
⚫May not realize
experience curve or
location economies.
⚫Shared ownership can
lead to conflict