BBA5001
IBM IIND MODULE

MODULE II
 Modes of Entry and International Institutions
 International Market Entry strategies,
 Market Selection and Barriers to it,
 FDI and FII.
 Multilateral Trade Agreements & TRIPs;
 Multilateral Environmental Agreements (MEAs);
 International Trade Blocks – NAFTA, ASEAN, SAARC,
EU.
 International Institutions - WTO, GATT, IMF, Asian
Development Bank and World Bank. FEMA, FERA Acts.

EXPORTING
 It is a strategy in which a company, without any
marketing or production organization overseas,
exports a product from its home base.
 Its main advantage is the ease in implementing the
strategy
 The product is often the same as the one marketed
in the home market
 Risks are minimal as company exports only the
surpluses

EXPORTING
 Very likely the most common overseas entry
approach for small firms
 The problem, however, is that it is not always an
optimal strategy
 It functions poorly when the company’s home-
country currency is strong.
 A currency can remain strong over a long period
thus creating problems for exports

EXPORTING-TYPES
1. INDIRECT EXPORTING
- Exporting the products either in their original form
or in the modified form to a foreign country
through another domestic country.
2. DIRECT EXPORTING
- Direct exporting is selling the products in foreign
country directly through its distribution
arrangements or through a host country’s
company.

EXPORTING-TYPES
3. INTRA-CORPORATE TRANSFERS
- selling of products by a company to its affiliated
company in host country (another country).
e.g., Selling of products by HUL in India to
Unilever in the USA.
This transaction is treated as exports in India and
imports in the USA.

LICENSING
 It is a reasonable compromise when export is
ineffective but the company is hesitant to invest
abroad directly
 It is an agreement that permits a foreign company
to use industrial property, technical know-hows and
skills, designs, or any combination of these
 Essentially, a licensor allows a foreign company to
manufacture a product for sale in the licensee’s
country and in other markets.

LICENSING
 Licensing is not only restricted to tangible products
 It is considered when capital is scarce, restrictions are
there, and ownership issues are there
 A company can avoid substantial risks and other
difficulties with licensing
 A prudent licensor doesn’t ‘assign’ a trademark to a
licensee

LICENSING
 It has its own shortcomings
 With reduced risk generally comes reduced profit
 By granting a license to a foreign firm, a manufacturer may
be nurturing a competitor in the future
 Another problem is the poor performance of the licensee
 Inconsistent product quality caused by licensee’s lax quality
control is another problem

JOINT VENTURES
 It is an enterprise formed for a specific purpose by
two or more investors
 Partners’ commitment to a JV is a function of the
perceived benefits
 It substantially reduces the amount of resources to
be contributed

JOINT VENTURES
 Often, it is the only way, apart from licensing, by
which a firm can enter a foreign market
 Sometimes social rather than legal circumstances
require a joint venture to be formed
 Sometimes it may lead to loss of control on the part
of one of the parties

ASSEMBLY OPERATIONS
 It is a variation of manufacturing strategy
 Parts or components are produced in various
countries to gain advantage
 It allows a company to be price-sensitive against
cheap imports
 Allows a company’s product to enter many markets
without any restrictions

MANAGEMENT CONTRACTS
 Sometimes, govt. pressure and restrictions force a
foreign company to sell or relinquish control of its
domestic operations
 Management contract is one such way with the govt. or
the new owner in order to manager business for the new
owner
 The new owner may lack expertise and may need
former owner to manage for some time
 It may be used to enter a market with a min. investment
and min. political risk

TURNKEY OPERATIONS
 An agreement by the seller to supply a buyer with a
facility fully equipped and ready to be operated by
the buyer’s personnel
 Sometimes used in fast food franchising
 Owing to the magnitude of a giant turnkey project,
the winner can expect huge rewards
 It is more than just offering technical assistance

ACQUISITIONS
 Used to enter a foreign market rapidly and retain
maximum control
 Reasons might be diversification, expertise, and
rapid entry
 A greenfield enterprise is generally welcomed by
the host govt.

ACQUISITIONS
 International M & As are complex, expensive and
risky. Quite often, the future synergies due to
vertical integration are elusive
 The value of a currency might reduce or increase
the costs of an acquisition
 The problems are numerous – suitable company,
price, debt, merging, language, resentment,
distance, etc.

STRATEGIC ALLIANCES
 It may be a result of merger, acquisition, JV, and
licensing
 JVs are strategic alliances but not vice-versa
 Chip making is one good example of it

STRATEGIC ALLIANCES
 Three types
 Shared distribution
 Licensed manufacturing (enabling partners to fill unused
capacity)
 Research & Development
 Motives for it include: access to new markets,
accelerating the entry pace, a more complete
product line, learning new skills, sharing R & D,
manufacturing and marketing costs

FRANCHISING
 It is a rapidly growing form of licensing
 Franchisor provides a standard package of
products, systems, and management services
 Franchisee provides market knowledge, capital,
and personal involvement in mgmt.

FRANCHISING
 Two types of franchise agreements
 Master franchise (McDonald’s)
 Licensing (Coca Cola bottling plants)
 The Franchisee pays a fee to the Franchisor
who provides
 Trade Marks
 Operating Systems
 Product Reputation
 Continuous Support System like Advertising,
Employee Training, Quality Assurance, etc.

FREE TRADE ZONES
 Variations among FTZs include free ports, tariff-free
trade zones, airport duty free arcades, export
processing zones, etc.
 It is not only for warehousing purpose
 Results in job retention and creation
 Can generate foreign investments

FREE TRADE ZONES
 Export processing zones, a special type of FTZ, are
set up by some countries due to political reasons
 Offers superior facilities for lower costs, lower theft
rate, lower insurance costs, etc.
 Prevent an overpayment of duties

BOT AND BOOT
 BOT (build, operate, transfer) - a third party, for example the
public administration, delegates to a private sector entity to
design and build infrastructure and to operate and maintain
these facilities for a certain period.
 BOOT (build, own, operate, transfer) is a business model in
which a private organization conducts a large development
project under contract to a public-sector partner, such as a
government agency.
 A BOOT project is often seen as a way to develop a large
public infrastructure project with private funding.
 Both of them find extensive usage in public-private
partnership

ASSOCIATED ENTRY MODES
 Newest, most recent form of international business
 Transfer of technology or know-how between firms
 Shared risks
 Better access to local market knowledge

ASSOCIATED ENTRY MODES : TYPES
 Joint Ventures
 Licensing
 Management Contracts
 International Franchising
 Industrial franchising
 Distribution franchising
 Service franchising

- EPRG MODEL

MARKET SELECTION : FIRM-RELATED
FACTORS
 Enthnocentric – everything is centred on the
domestic market
 Polycentric – several important foreign markets
exist
 Regiocentric – the market is composed of several
large economic regions
 Geocentric – the world is one large global market

RESTRAINING FORCES OF INTERNATIONAL
MARKETING
 Culture
 Market differences
 Costs
 National controls
 Nationalism
 Peace vs War / Stability
 Management myopia
 Organization history
 Domestic focus

FACTORS IN THE ENTRY-MODE DECISION
Target Country
Market Factors
Target Country
Environmental
Factors
Target Country
Production
Factors
Home Country
Factors
Entry Mode
Decision
Company
Resource and
Commitment
Factors
Company
Product Factors
External Factors
Internal Factors

TYPES OF FOREIGN INVESTMENT
Foreign
Investment
Direct Investment
(FDI)
Wholly Owned
Subsidiary
Joint Venture
Acquisition
Portfolio Investment
(FPI)
Investment By
FIIs
Investment In GDRs,
ADRs, FCCBs

FOREIGN DIRECT INVESTMENT
1. It is investment of foreign assets into domestic
structures, equipment, and organizations.
2. It does not include foreign investment into the stock
markets.
3. FDI is thought to be more useful to a country than
investments in the equity of its companies because
equity investments are potentially "hot money"
which can leave at the first sign of trouble, whereas
FDI is durable and generally useful whether things
go well or badly.

FACTORS WHICH INFLUENCE FDI IN INDIA
 Stable political structure
 Large economy with a growing middle-class
 Open-door policy
 Abundance of natural resources
 Cost-effective labour which is largely skilled
 Large English-speaking population

FACTORS WHICH INFLUENCE FDI IN INDIA
 Large pool of qualified professionals
 Impressive banking network
 Compliance to global standards
 Well-established and independent judicial system
 Good international relations
 Large and expanding industrial base

FOREIGN INSTITUTIONAL INVESTORS
 A foreign institutional investor (FII) is an investor or
investment fund registered in a country outside of
the one in which it is investing.
 Institutional investors most notably include hedge
funds, insurance companies, pension funds and
mutual funds.
 The Foreign Institutional Investor is also known as
hot money as the investors have the liberty to sell it
and take it back.

WHAT ARE FOREIGN INVESTORS LOOKING FOR?
 Good projects
 Demand Potential
 Revenue Potential
 Stable Policy Environment/Political Commitment
 Optimal Risk Allocation Framework

FDI
1. It is long-term investment
2. Investment in physical assets
3. Aim is to increase enterprise capacity or
productivity or change management control
4. Leads to technology transfer, access to markets
and management inputs
5. FDI flows into the primary market
6. Entry and exit is relatively difficult
7. FDI is eligible for profits of the company
8. Does not tend be speculative
9. Direct impact on employment of labour and
wages
10. Abiding interest in mgt.
FII
1. It is generally short-term investment
2. Investment in financial assets
3. Aim is to increase capital availability
4. FII results in only capital inflows
5. FII flows into the secondary market
6. Entry and exist is relatively easy
7. FII is eligible for capital gain
8. Tends to be speculative
9. No direct impact on employment of labour and
wages
10. Fleeting interest in mgt.
DIFFERENTIATION BETWEEN FDI & FII
FDI is more preferred to the FII as they are considered to be the most
beneficial kind of foreign investment for the whole economy.

MULTILATERAL (OR REGIONAL) TRADE
AGREEMENTS
 Bilateral Agreements
 They set rules of trade between two countries.
 Multilateral (or Regional) Trade Agreements
 They set rules of trade between several countries.
 Multilateral agreements shape international trade
unions, such as WTO, EU, NAFTA, etc.
 This makes them extremely complicated to negotiate,
but very powerful once all parties sign.

MULTILATERAL (OR REGIONAL) TRADE
AGREEMENTS
 The primary benefit of multilateral agreements is
that all nations get treated equally.
 The first is the Doha round of trade agreements.
This was a multilateral trade agreement between all
149 members of the World Trade Organization
(WTO).
 The most successful multi-lateral agreement has
been the GATT (the General Agreement on Trade
and Tariffs)

TRIPS
 Negotiated in the 1986-94 Uruguay Round
 Trade Related Aspects of Intellectual Property
Rights (TRIPS) is a World Trade Organization
(WTO) agreement designed by developed countries
to enforce a global minimum standard of Intellectual
Property Rights.

TRIPS - IPR
 Intellectual property (IP) is a term referring to a number of distinct
types of creations of the mind for which a set of exclusive rights are
recognized and the corresponding fields of law.
 Under IPR, owners are granted certain exclusive rights to a variety
of intangible assets, such as musical, literary, artistic works;
discoveries, inventions; ad words, phrases, symbols, and designs.
 Monitored by World Intellectual Property Organization (WIPO),
Switzerland.

TYPES OF IPR
Intellectual property is divided into two categories
Industrial property which includes
• patents for inventions,
• trademarks,
• industrial designs and
• geographical indications
Copyright and related rights which cover
• literary and artistic expressions (e.g. books, films,
music, architecture, art),
• rights of performing artists in their performances,
producers of phonograms in their recordings, and
broadcasters in their radio and television broadcasts
which are also referred to as neighbouring rights.

 Copyrights - a legal concept giving the creator of an original
work exclusive rights to it, usually for a limited time.
 Trademarks - a distinctive sign or indicator used by an
individual, business organization, or other legal entity to identify
those products or services to consumers
 Patents - a set of exclusive rights granted by a sovereign state to
an inventor for a limited period of time in exchange for the public
disclosure of an invention.
 Industrial design rights - protects the visual design of objects
that are not purely utilitarian.
 Geographical Indication - place names (in some countries also
words associated with a place) used to identify the origin and
quality, reputation or other characteristics of products
 Trade Secrets

MULTILATERAL ENVIRONMENTAL
AGREEMENTS (MEAS)
International legal instruments that:
 have a goal of environmental protection
 are concluded between a large number of states or
international organizations as parties
 concluded in written form
 governed by international law
 can be embodied in a single instrument or in two or
more related instruments (framework agreements)

MEAS
 MEAs are of global significance
 negotiation, development or activities are
associated with UNEP (United Nations
Environment Programme) work
 Main clusters:
 Biodiversity
 atmosphere
 land
 chemicals and hazardous wastes
 regional seas and related

MEAS
 Shared Goal:
 Sustainable Development
 Cross-cutting issue:
 pollution/waste management

NAFTA
 The North American Free Trade Agreement
(NAFTA)is an agreement signed by Canada, Mexico,
and the United States, creating a trilateral rules-based
trade bloc in North America. It came into force in 1994
 The goal of NAFTA was to eliminate barriers to trade
and investment between the U.S., Canada and Mexico.
 It brought the immediate elimination of tariffs on more
than one-half of Mexico's exports to the U.S. and more
than one-third of U.S. exports to Mexico.

NAFTA
 The current US President Donald Trump is critical
of NAFTA and says that he would repeal it
 Currently, the trade between US-Canada and US-
Mexico stand at modest levels and contribute only a
small percentage towards US GDP

EU (EUROPEAN UNION)
 The European Union (EU) is a politico-economic
union of 28 member states that are located
primarily in Europe.
 The EU operates through a system of supranational
institutions and intergovernmental-negotiated
decisions by the member states.
 The EU has developed a single market through a
standardised system of laws that apply in all
member states.

EU (EUROPEAN UNION)
 With a combined population of over 510 million
inhabitants, or 7.3% of the world population, the EU
in 2016 generated a nominal gross domestic
product (GDP) of 16.44 trillion US dollars,
constituting approximately 22% of global nominal
GDP and 17% when measured in terms of
purchasing power parity
 Presently, the EU is going through the impact of
‘Brexit’, the exit of Great Britain from it, a proposal
to this effect having been passed in July 2016.

SAARC (SOUTH ASIAN ASSOCIATION FOR
REGIONAL COOPERATION )
 The South Asian Association for Regional Cooperation
(SAARC) is an economic and geopolitical organisation of
eight countries that are primarily located in South Asia or the
Indian subcontinent. It was formed in 1980
 The combined economy of SAARC is the 3rd largest in the
world in the terms of GDP(PPP) after the United States and
China
 The organisation was established by the governments of
Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and
Sri Lanka. Since then the organisation has expanded by
accepting one new full member, Afghanistan

SAARC (SOUTH ASIAN ASSOCIATION FOR
REGIONAL COOPERATION )
 The SAARC policies aim to promote welfare
economics, collective self-reliance among the
countries of South Asia, and to accelerate socio-
cultural development in the region.
 The SAARC has developed external relations by
establishing permanent diplomatic relations with the
EU, the UN (as an observer), and other multilateral
entities.

ASEAN (ASSOCIATION OF SOUTHEAST ASIAN
NATIONS)
 The Association of Southeast Asian Nations is a political
and economic organization of ten Southeast Asian
countries.
 It was formed in 1967 by Indonesia, Malaysia, the
Philippines, Singapore, and Thailand. Since then,
membership has expanded to include Brunei,
Cambodia, Laos, Myanmar (Burma), and Vietnam.
 The member countries have a combined population of
approximately 625 million people, 8.8% of the world's
population. In 2015, the organization's combined
nominal GDP had grown to more than US$2.6 trillion.

GATT (THE GENERAL AGREEMENT ON TRADE AND
TARIFFS)
 GATT was signed in 1947 between 153 countries.
 Its goal was to reduce tariffs and other trade
barriers. It took eight rounds of negotiations that
lasted until 1995 to achieve its goal with the final
Uruguay round.
 This round created the WTO, which took over
management of future GATT negotiations.

WORLD TRADE ORGANIZATION (WTO)
 The World Trade Organization (WTO) came into being
on January 1st 1995. It was the outcome of the lengthy
(1986-1994) Uruguay round of GATT negotiations. The
WTO was essentially an extension of GATT.
 It extended GATT in two major ways. First GATT
became only one of the three major trade agreements that
went into the WTO (the other two being the General
Agreement on Trade in Services (GATS) and the
agreements on Trade Related Aspects of Intellectual
Property Rights (TRIPS)).

WORLD TRADE ORGANIZATION (WTO)
 Second, the WTO was put on a much sounder
institutional footing than GATT. With GATT the support
services that helped maintain the agreement had come
into being in an ad hoc manner as the need arose. The
WTO by contrast is a fully fledged institution (GATT
was, at least formally, only an agreement between
contracting parties and had no independent existence of
its own while the WTO is a corporate body recognized
under international law).

WORLD BANK
 The World Bank is an international financial
institution that provides loans to developing
countries for capital programs.
 It comprises two institutions: the International Bank
for Reconstruction and Development (IBRD) and
the International Development Association (IDA).
 The World Bank is a component of the World Bank
Group, and a member of the United Nations
Development Group.

WORLD BANK
 The World Bank was created at the 1944 Bretton
Woods Conference, along with three other
institutions, including the International Monetary
Fund (IMF).
 The president of the World Bank is, traditionally, an
American. The World Bank and the IMF are both
based in Washington, D.C., and work closely with
each other.

INTERNATIONAL MONETARY FUND (IMF)
 The International Monetary Fund (IMF) is an
international organization headquartered
in Washington, D.C., of "189 countries working to
foster global monetary cooperation, secure financial
stability, facilitate international trade, promote high
employment and sustainable economic growth, and
reduce poverty around the world.“
 Formed in 1944 at the Bretton Woods Conference,
it came into formal existence in 1945 with 29
member countries and the goal of reconstructing
the international payment system.

ASIAN DEVELOPMENT BANK (ADB)
 The Asian Development Bank (ADB) is a regional
development bank established in 1966 which is
headquartered in Metro Manila, Philippines, to facilitate
economic development in Asia.
 The bank admits the members of the United Nations
Economic and Social Commission for Asia and the
Pacific (UNESCAP, formerly the Economic Commission
for Asia and the Far East or ECAFE) and non-regional
developed countries.
 From 31 members at its establishment, ADB now has 67
members, of which 48 are from within Asia and the
Pacific and 19 outside.

FOREIGN EXCHANGE REGULATION ACT,
(FERA)
 Foreign Exchange Regulation Act, shortly known as
FERA, was introduced in the year 1973.
 The act came into force, to regulate foreign
payments, securities, currency import and export
and purchase of fixed assets by foreigners.
 The act was promulgated in India when the position
of foreign reserves wasn’t satisfactory.

FOREIGN EXCHANGE MANAGEMENT ACT,
1999 (FEMA)
 Foreign Exchange Management Act, 1999
(FEMA) emerged as a replacement or say an
improvement over the old Foreign Exchange
Regulation Act, 1973 (FERA).
 Foreign investors, frequently hear the terms FERA and
FEMA, when they deal with India. As their name
specifies, FERA lays emphasis on the regulation of
currencies, whereas the FEMA manages forex.
 The main objective of the act is to facilitate foreign trade
and to encourage systematic development and
maintenance of forex market in the country.

DIFFERENCE
 There are many differences between FERA and
FEMA, the foremost difference is, while the former
requires previous approval of Reserve Bank of
India (RBI), the latter does not require RBI’s
approval, except when the transaction is related to
foreign exchange.