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Content
1. Meaning
2. Modes of entry into International Business
3. Download PPT
1. Meaning of International Business
In simple words, International business refers to the trade of goods, services, technology, capital, and/or knowledge across national borders and on a global scale.
It involves cross-border transactions of goods and services between two or more countries. Transactions of economic resources include capital, skills, and people for the purpose of the international production of physical goods and services such as finance, banking, insurance, and construction.
2. MODES OF ENTRY INTO INTERNATIONAL BUSINESS
- EXPORTING
- LICENSING
- FRANCHISING
- MERGER & ACQUISITION
- FDI
- JOINT VENTURE
- CONTRACT MANUFACTURING
- STRATEGIC ALLIANCE
1. EXPORTING
It is the process of selling goods and services produced in one country to another countries. Exporting may be direct or indirect.
Direct export– A company capitalizing on economies of scale in production concentrated in the home country, establishes a proper system for organizing export functions and procuring foreign sales.
Indirect export- involves exporting through domestically based export intermediaries. The exporter has no control over his product in the foreign market.
Advantages
It helps in the distribution of surplus.
It is less risky.
Under direct export, the exporter has control over the selection of market
It helps in fast market access
Disadvantages–
High start-up cost in case of direct exports
In Indirect export, the exporter has no control over the distribution of products
Exporting through export intermediaries increases the cost of the product
2. LICENSING
Licensing is a method in which a firm gives permission to a person to use its legally protected product or technology and to do business in a particular manner, for an agreed period of time and within an agreed territory. It is a very easy method to enter a foreign market as less control and communication are involved.
Example: Starbucks (licensor) and Nestle (licensee) for exclusive rights to sell Starbucks’ product
Advantages
Less investment is involved
Low cost of labour
Disadvantages
This method is time-consuming
The decline in product quality may harm the reputation of the licensor
3. FRANCHISING
It is a system in which semi-independent business owners (franchisees) pay fees and royalty to a parent company (franchiser) in return for the right to be identified by its trademark, to sell its product or services, and often to use its business format or system.
Example: Burger King, McDonald etc.
Advantages
It is less risky
Advantage of expertise of franchiser
Highly motivated employees
Disadvantages
Difficulty in keeping trade secrets
Franchisee may become a future competitor
A wrong franchisee may ruin the company’s name and goodwill
4. MERGER & ACQUISITION
A merger is a combination of two or more district entities into one, the desired effect being a accumulation of assets and liabilities of distinct entities and several other benefits such as economies of scale, tax benefits, fast growth, synergy, diversification, etc. The merging entities cease to be in existence and merge into a single servicing entity.
Example: Vodafone and Idea formed a new company VI.
Acquisition implies the acquisition of controlling interest in a company by another company. It does not lead to the dissolution of a company whose shares are acquired. It may be a friendly or hostile acquisition or a bail-out takeover.
Example: LIC Acquired IDBI Bank.
Advantages
Low cost of production
Development of medium and small scale industries
No dilution of control
Disadvantages
– Difficulty in maintaining quality standards
– Local manufacturers in foreign markets may lose business
5. FDI
It is a mode of entering foreign markets through investment. Investment may be directly or indirectly through financial institutions. FDI influences the investment pattern of the economy and helps to increase overall development. The extent to which FDI is allowed in a country is subjected to the government regulations of that country.
Advantages
Modifications can be made at any point in time
It is an easy mode of entry
Disadvantages
The government policies may not be helpful
The return on investment may be low
Read More: Advantages and Disadvantages of Liberalisation
6. JOINT VENTURE
It is a strategy used by companies to enter a foreign market by joining hands and sharing ownership and management with another company. It is used when two or more companies want to achieve some common objectives and expand international operations.
Example: Uber (a taxi company) and Volvo (a heavy vehicle co.)
The common objectives are–
Foreign market entry
Risk/reward sharing
Technology sharing
Joint product development
It is useful to meet the shortage of financial resources, physical or managerial resources
Advantages
Technological competence
Optimum use of resources
Partners are able to learn from each other
Disadvantages
Conflicts over asymmetric investment
Cultural and political stability may pose a threat to successful operations
Conflicts in management
7. CONTRACT MANUFACTURING
When a foreign firm hires a local manufacturer to produce their product or a part of their product it is known as contract manufacturing. This method utilizes the skills of a local manufacturer and helps in reducing the cost of production. The marketing and selling of the product is the responsibility of the international firm.
Example: Foxconn Technology (Local manufacturer) group that supplies products to high profile companies like Microsoft. Apple and Amazon
Advantages
1. Low cost of production
2. Development of medium and small scale industries
3. No dilution of control
Disadvantages
1. Difficulty in maintaining quality standards
2. Local manufacturers in foreign markets may lose business
8. STRATEGIC ALLIANCE
It is a voluntary formal agreement between two companies to pool their resources to achieve a common set of objectives while remaining independent entities. It is mainly used to expand the production capacity and increase market share for a product.
Alliances help in developing new technologies and utilizing the brand image and market knowledge of both companies. Example: Apple Pay and Master Card
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