The long-term advantages of doing international business in a particular country depend upon the following factors −
● Size of the market demographically
● The purchasing power of the consumers in that market
● Nature of competition
By considering the above-mentioned factors, firms can rank countries in terms of their attractiveness and profitability. The timing of entry into a nation is a very important factor. If a firm enters the market ahead of other firms, it may quickly develop a strong customer base for its products.
There are seven major modes of entering an international market. In this chapter, we will take up each mode and discuss their advantages and disadvantages.
An item produced in a domestic market can be sold abroad. Storing and processing is mainly done in the supplying firm’s home country. Export can increase the sales volume. When a firm receives canvassed items and exports them, it is called Passive Export.
Alternately, if a strategic decision is taken to establish proper processes for organizing the export functions and for obtaining foreign sales, it is known as Active Export.
● Advantages − Low investment; Less risks
● Disadvantages − Unknown market; No control over foreign market; Lack of information about external environment
In this mode of entry, the manufacturer of the home country leases the right of intellectual properties, i.e., technology, copyrights, brand name, etc., to a manufacturer of a foreign country for a predetermined fee. The manufacturer that leases is known as the licensor and the manufacturer of the country that gets the license id known as the licensee.
● Advantages − Low investment of licensor; Low financial risk of licensor; Licensor can investigate the foreign market; Licensee’s investment in R&D is low; Licensee does not bear the risk of product failure; any international location can be chosen to enjoy the advantages; No obligations of ownership, managerial decisions, investment etc.
● Disadvantages − Limited opportunities for both parties involved; Both parties have to manage product quality and promotion; One party’s dishonesty can affect the other; Chances of misunderstanding; Chances of trade secrets leakage of the licensor.
In this mode, an independent firm called the franchisee does the business using the name of another company called the franchisor. In franchising, the franchisee has to pay a fee or a fraction of profit to the franchisor. The franchisor provides the trademarks, operating process, product reputation and marketing, HR and operational support to the franchisee.
Note − The Entrepreneur magazine’s top ranker in “The 2015 Franchise 500” is Hampton Hotels. It has 2,000 hotels in 16 countries.
● Advantages − Low investment; Low risk; Franchisor understands market culture, customs and environment of the host country; Franchisor learns more from the experience of the franchisees; Franchisee gets the R&D and brand name with low cost; Franchisee has no risk of product failure.
● Disadvantages − Franchising can be complicated at times; Difficult to control; Reduced market opportunities for both franchisee and franchisor; Responsibilities of managing product quality and product promotion for both; Leakage of trade secrets
It is a special mode of carrying out international business. It is a contract under which a firm agrees – for a remuneration – to fully carry out the design, create, and equip the production facility and shift the project over to the purchaser when the facility is operational.
Mergers & Acquisitions
In Mergers & Acquisitions, a home company may merge itself with a foreign company to enter an international business. Alternatively, the home company may buy a foreign company and acquire the foreign company’s ownership and control. M&A offers quick access to international manufacturing facilities and marketing networks.
● Advantages − Immediate ownership and control over the acquired firm’s assets; Probability of earning more revenues; The host country may benefit by escaping optimum capacity level or overcapacity level
● Disadvantages − Complex process and requires experts from both countries; No addition of capacity to the industry; Government restrictions on acquisition of local companies may disrupt business; Transfer of problems of the host country’s to the acquired company.
When two or more firms join together to create a new business entity, it is called a joint venture. The uniqueness in a joint venture is its shared ownership. Environmental factors like social, technological, economic and political environments may encourage joint ventures.
● Advantages − Joint ventures provide significant funds for major projects; Sharing of risks between or among partners; Provides skills, technology, expertise, marketing to both parties.
● Disadvantages − Conflicts may develop; Delay in decision-making of one affects the other party and it may be costly; The venture may collapse due to the entry of competitors and the changes in the partner’s strength; Slow decision-making due to the involvement of two or more decision-makers.
Wholly Owned Subsidiary
Wholly Owned Subsidiary is a company whose common stock is fully owned by another company, known as the parent company. A wholly owned subsidiary may arise through acquisition or by a spin-off from the parent company.