1. International Business
Module 2

2. Modes of Entry
 Companies desiring to enter foreign markets face the dilemma while deciding the
mode of entry into a given overseas location
 This dilemma can be solved by considering the following factors
a) Ownership Advantages
b) Location Advantages
c) Internationalization Advantages

3. Ownership Advantages
 These are the advantages which the company will get by owning the resources
 Tata Iron and Steel Company Ltd---owned iron ores and coal mines—they got the
advantage of low cost producer

4. Location Advantages
 Certain locational factors grant benefit to the company’
a)Customer needs, preferences, tastes
b)Logistics requirements
c)Cheap Land Acquisition cost
d)Cheap Labor
e)Low cost Raw materials
f)Climatic Conditions
If locational conditions favorable –Direct investment
If not—export
Mc Donalds build factory in Cairo, Egypt- due the over restrictions and formalities for
importing hand burger buns

5. International Advantage
 These are the benefits a company gets by manufacturing goods and rendering
services in the host country by itself rather than contract arrangements with the
host country
 If its difficult and costly to enter agreements with host country---Direct Investment
 If it costs low then the company can go in for contract agreements
 Toyota---entered foreign market---Direct investment as the domestic companies
cannot produce efficiently as toyota

6. Modes of entry
Exporting Licensing Franchising
Special Modes
Foreign Direct
investment without
alliances
Foreign Direct
investment without
alliances

7. Exporting
 Simplest and widely used mode
 Here you can export with the help of a company in the host country(to distribute)
 Or it can choose to distribute on its own
 Advantages
a)Need for limited finance
b)Less risk
c)Motivation for exporting (proactive & reactive)
Proactive- due to the opportunities available in the host country
Reactive-due to decline in demand in domestic country

8. Forms of Exporting
Indirect Exporting
• Exporting products to
a foreign country
through another
domestic company
• Himalaya Publication-
sell-various exporters-
export-foreign
countries
Direct Exporting
• Selling the products
directly through
distribution
arrangements or
through a company
host country
Intra-corporate
transfers
• Selling the products to
its affiliated company
• Hindustan Unilever-
Unilever

9. Factors to be considered
Government
Policies
Export &Import Policies,
foreign exchange
Marketing
Factors
Image , distribution
network, customer
preference
Logistical
Intermediaries
Physical distribution,
warehouse costs

10. Export Intermediaries
 They help small companies to export their goods to foreign countries
Functions
a)Transportation
b)Documentation
c)Taking ownership of foreign bound goods
d)Assuming total responsibility of exporting and financing

11. Types of intermediaries
 Export Management Companies
Act as export department of the exporting firm
They are commission agents for exports
 Co-operative society
The domestic companies who want to export form a co-operative society –this undertakes
operations for its members
 International trading company
It buys goods from domestic companies and exports
 Manufacturers Agent
They work on commission basis. They take domestic orders for foreign manufacturers

12.  Manufacturers Export Agent
They sell domestic manufacturers product in foreign markets and act as sales
department on commission basis
 Export and Import Brokers
They bridge the gap between exports and imports and bring them together
 Freight Forwarders
They help in exporting by performing functions like physical transportation of goods,
arranging customs documents

13. Licensing
 The domestic manufacturer releases the right to use its intellectual property right
to a manufacturer in a foreign country for a fee
 domestic manufacturer- licensor
 manufacturer in a foreign country- licensee
 Very popular method to enter foreign market
 Less costly
 No capital needs to be invested as it has already invested in IP

14. Licensor leases
the right to use
IP
Use IP to
produce
products-
Licensee
Licensee pays
royalty for
using IP
Licensor
receives royalty

15. Issues in Licensing
 Boundaries of the agreement should be clearly mentioned
 Determination of royalty
 Determining the rights, privileges and constraints(if Indian licensee uses inferior
inputs to reduce price of product, then the licensors image will be damaged)
 Dispute settlement mechanism should be clearly mentioned as settlement in court
is costly
 Agreement duration (not short term )
 Find out the advantages and disadvantages of licensing

16. Franchising
 A form of licensing
 Here franchisor can exercise more control than licensor
 “here an independent organization operates the business under the name of
another company”
 Independent organization-Franchisee
 Company-franchisor
 Franchisee pays a fee to franchisor

17. Facilities offered
 Trade mark
 Operating system
 Product reputation
 Continuous support system like advertisement, employee training etc

18. Franchising Agreements
 Franchisee has to pay fee of fixed amount and royalty on the sales
 Franchisee should agree to follow the franchisors requirements like appearance,
reporting, customer service
 Franchisor helps in setting manufacturing facilities ,advertising, service facilities
 Franchisor allows franchisee some degree of flexibility relating to local preferences
McD in Germany sells beer/McD in France sells wine
NIIT has franchised computer training centers across India
Find out the advantages and disadvantages

19. Special Modes
 Some companies use specialized strategies
a)Contract Manufacturing
b)BPO
c)Management Contracts
d)Turnkey Projects

20. Contract Manufacturing
 Some companies outsource a part or entire production and concentrate on
marketing operations
 Nike—contract with factories in South East Asia and concentrates on marketing

21. Management Contracts
 Companies with low level technology and managerial expertise may seek the
assistance of foreign company
 The foreign company agrees to provide technical and managerial expertise ----
MANAGEMENT CONTRACT
 For a certain period for monetary compensation
 It is done mostly due to government interference
Government of Kingdom of Saudi Arabia---nationalized Armco and requested former
owners to manage the company
Compensation may be in the form of
a)Flat fee
b)Percentage over sale
c)Performance Bonus based on profitability, sales growth ,production or quality

22. Turnkey Project
 A turnkey project is a contract under which a firm agrees to fully design, construct
and equip a manufacturing business/service facility and turn the project over to the
purchaser when it is ready for operation for remuneration
 National highway, airports, nuclear power plants
 Remuneration may be
a)A fixed price
b)Payment on cost plus profit
Recent approach BUILD,OPERATE ,TRANSFER(BOT)- here remuneration is not paid…
e.g.They build ,operate for 20-25 years then transfer

23. FDI without alliances
 Some companies enter international markets through FDI, invest their money,
establish manufacturing and marketing facilities through ownership and control
 These countries enter foreign markets by exporting, licensing etc then study the
market and then establish manufacturing and marketing facility
 Green field Investment:
This refers to starting of operations of a company from scratch
Name suggests starting from unused green site

24. BPO
 Business Process Outsourcing
 BPO is the process of hiring another company to handle business activities
for you.
 Business process outsourcing (BPO) is a subset of outsourcing that involves the
contracting of the operations and responsibilities of specific business functions(or
processes) such as payroll, customer service, accounting, data recording and much
more to a third-party service provider.
 IT, Management & Business operations
 Why BPO?
Availability of highly qualified skill pool and faster adoption of well defined
business process leads to higher productivity gains without compromising on the
quality

25. Why does a company outsource ?
Not all companies, especially the smaller one, have the cost expertise needed to
manage a complex network of the activity they need. For eg. many bank don’t
have expertise to manage a complex network of ATMs.
Outsourcing enables an enterprises to concentrate its time and efforts on its key
function.
Companies need not invest money in creating and maintaining system non core
activities.
When the predictability of the process/service is not important.
When there is limited opportunity for the firm to distinguish itself competitively
through a particular process/service.

26. BPO Categories
 It is often divided into two categories :
Back Office Outsourcing which includes internal
business functions such as billing or purchasing.
 Front Office Outsourcing which includes
customer-related services such as marketing or
tech support.

27. Key Terms of BPO
BPO that is contracted outside a
company's own country.
BPO that is contracted with the
company's own country.
BPO that is contracted to a company's
neighboring country.

28. Foreign Direct Investment with Strategic
Alliances
 It refers to a co-operative and collaborative approach to achieve larger goals
 It is a strategy to explore a new market which the companies individually cannot do
 Why alliance?
Many complicated issues are solved through alliance
It would help to develop strategies
It provides the parties each others strengths
It would be beyond the ability of the company to meet the requirements of heavy
outlay

29.  Competitive advantage is gained through synergy
 Gaining market through alliances with local companies
FDI with alliances may be with
Mergers and Acquisitions
Joint Ventures

30. Mergers and Acquisition
 A domestic company selects a foreign company and mergers itself with the foreign
company to enter international business
 It may purchase a foreign company and acquire its ownership and control
 This provides easy and instant entry
 Cheaper than greenfield strategy

31. Joint Venture
 Two or more firms join together to create a new business entity that is legally
separate and distinct from its parents’
 It involves shared ownership
 It provides required strengths in the form of required capital, technology and help
to share risk
 It involves local companies, this improves local image and gets the support of
government
 The life cycle of a joint venture—
Exploratory stage---alliances/collaborations/feasibility studies
Some collapse/some remain stable/some collapse in stability(entry of competitors,
change in environment, change in partners strength/interest

32. Partners in Joint Venture
 Host country's Government (Public-Private venture)
 Private partners (Joint venture with Private companies)
 Joint ventures with MNCs

33. Functional Alliances
 Production Alliances: Two manufacturing companies share the common
manufacturing facilities
 They may use existing manufacturing facilities owned by one of them
 Manufacturing Alliances:Two companies share marketing expertise and
facilities
 Financial Alliances: Two companies join together in order to reduce financial risk
associated with the project. Partners contribute jointly to share risk and profits
 Research and Development Alliances :They form alliances in Research and
development areas

34. Breakup of alliances
 Incompatibility of Partners: Incompatibility of partners in management styles,
culture, financial position etc
 Access to information: Should provide necessary information to other party
 Distribution of income: Conflicts arise on distribution of profits’
 Changes in Business environment
 Acquire the strengths of partners and turn their weakness to strengths and
breakup’
 Legal Factors: Changes in laws

35. Managing Conflict Situations
 Compatibility- Trust
 Nature of Potential partners Products/services: Companies with complementary
but not competitive products and services can have alliance
 The relative safeness of the alliance: should check out for previous alliances of
the company and then go for it