MODE OF ENTRY INTO

INTERNATIONAL BUSINESS
Mode of entry may be defined as the institutional mechanism by which a firm makes it
products or services available to the consumers in the international market. The following
are the various mode of entry into international business:

EXPORTING

Exporting is the easiest mode of entry into international business. Therefore most firms
begin their international expansion using this model of entry. Exporting is the sale of
products and services in foreign countries that are sourced from the home country. The
exports are of two types:

Direct Exports: These include the sale of goods from the firm to the seller overseas
directly. In this firm experience first hand information about the market. There is no
intermediary involved.
 Indirect Exports: In this, the exporter hires the expertise of someone else to facilitate the
exchange. The intermediary charges the fee for its services. There are several types of
intermediaries:

• Manufacturers’ export agents: who sell the company’s product overseas

• Manufacturers’ representatives: who sell the products of a number of exporting firms
in overseas markets
• Export commission agents: who act as buyers for overseas markets
• Export merchants: who buy and sell on their own for a variety of markets.

ADVANTAGES OF EXPORTING

• It involves very little risk and low allocation of resources for the exporter.
• It increase sales and reduce inventories.
• Exporting also provides an easy way to identify market potential
• It establishes recognition of a name brand.
• If the enterprise proves unprofitable, the company can simply stop the practice with no
diminution of operations in other spheres and no long-term losses of capital investments.

DISADVANTAGES OF EXPORTING

• Exporting can be more expensive because of the costs of fees, commissions, export
duties, taxes, and transportation.
• Exporting could lead to less-than-optimal market penetration because of inappropriate
packaging or promotion.
• Exported goods could also be lacking features appropriate to specific overseas markets.
• Additional market share could be lost if local competition copies the products or services
offered by the exporter.
• The exporting firm also could face restrictions against its products from the host country.

LICENSING

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. The license is granted for a predetermined fee. The manufacturer that
leases is known as the licensor and the manufacturer of the country that gets the license
is known as the licensee. In essence, the licensee is buying the assets of another firm in
the form of know-how or R & D. The licensor can grant these rights exclusively to one
licensee or nonexclusively to several licensees.

ADVANTAGES OF LICENSING
• 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 OF LICENSING

• It limits future profit opportunities associated with the property by tying up its rights for
an extended period of time.
• By licensing these rights to another, the firm loses control over the quality of its products
and processes, the use or misuse of the assets, and even the protection of its corporate
reputation.
• 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.

FRANCHISING

In this mode, an independent firm called the franchisee does the business using the name
of another company called the franchisor.

Franchising is mode in which the franchisee is granted permission to use a name, process,
method, or trademark. And also the franchisor firm assists the franchisee with the
operations of the franchise or supplies raw materials, or both.

The franchisor generally also has a larger degree of control over the quality of the
product. Payment under franchising agreements is that the franchisee pays an initial fee
and a proportion of its sales or revenues to the franchising firm.

EXAMPLES: The prime examples of U.S. franchising companies are service industries
and restaurants, particularly fast-food concerns, soft-drink bottlers, and home and auto
maintenance companies i.e. McDonald’s, KFC etc.

ADVANTAGES OF FRANCHISING

• 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 OF FRANCHISING

• 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.

MANAGEMENT CONTRACTS

Management contracts are contracts under which a firm basically rents its expertise or
know-how to a government or company in the form of personnel who enter the foreign
environment and run the concern.

TURNKEY PROJECTS

It is a special mode of carrying out international business. It is a contract under which a

firm agrees 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. The amount of
relevant remuneration is charged for the same.

ADVANTAGES OF TURNKEY PROJECTS

• These projects are suitable for the large scale production.

• These projects are undertaken in collaboration with management contracts to achieve the
highest level of efficiency.

DISADVANTAGES OF TURNKEY PROJECTS

• The project completion time is lengthy hence there are higher chances of currency risks.
• Due to lengthy project duration, the returns are not available in short time.
• Turnkey operations also face all the problems of operating in remote locations.

CONTRACT MANUFACTURING

Contract manufacturing is another method firms use to enter the foreign arena or
international business scenario. In this case, an MNC contracts with a local firm to
 provide manufacturing services. In this arrangement, the MNC subcontracts the
production in two ways:

• In one scenario, the MNC enters into a full production contract with a local plant
producing goods to be sold under the name of the original manufacturer.
• In a second scenario, the MNC enters into contracts with another firm to provide partial
manufacturing services, such as assembly work or parts production.

ADVANTAGES OF CONTRACT MANUFACTURING

• Contract manufacturing has the advantage of expanding the supply or production

expertise of the contracting firm at minimum cost.
• The MNC can diversify vertically without a full-scale commitment of resources and
personnel.

DISADVANTAGE OF CONTRACT MANUFACTURING

• The firm forgoes some degree of control over the production supply timetable when it
contracts with a local firm to provide specific services.

FOREIGN DIRECT INVESTMENT

Foreign Direct Investment involves a company entering an overseas market by making a

substantial investment in the country. Some of the modes of entry into international
business using the foreign direct investment strategy includes mergers and acquisitions,
joint ventures and greenfield investments.

This strategy is suitable when the demand or the size of the market, or the growth
potential of the market in the substantially large to justify the investment.

Some of the reasons because of which companies opt for foreign direct
investment strategy as the mode of entry into international business can include:

• Restriction or import limits on certain goods and products.

• Manufacturing locally can avoid import duties.
• Companies can take advantage of low-cost labour, cheaper material.

ADVANTAGES OF FOREIGN DIRECT INVESTMENT

• You can retain your control over the operations and other aspects of your business
• Leverage low-cost labour, cheaper material etc. to reduce manufacturing cost towards
obtaining a competitive advantage over competitors
• Many foreign companies can avail for subsidies, tax breaks and other concessions from
the local governments for making an investment in their country

DISADVANTAGES OF FOREIGN DIRECT INVESTMENT

• The business is exposed to high levels of political risk, especially in case the government
decides to adopt protectionist policies to protect and support local business against
foreign companies
• This strategy involves substantial investment to be made for entering an international
market

JOINT VENTURES

A joint venture is one of the preferred modes of entry into international business for
businesses who do not mind sharing their brand, knowledge, and expertise.

Companies wishing to expand into overseas markets can form joint ventures with local
businesses in the overseas location, wherein both joint venture partners share the rewards
and risks associated with the business.

Both business entities share the investment, costs, profits and losses at the predetermined
proportion.

This mode of entry into international business is suitable in countries wherein the
governments do not allow one hundred per cent foreign ownership in certain industries.

For instance, foreign companies cannot have a 100 hundred per cent stake in broadcast
content services, print media, multi-brand retailing, insurance, power exchange sectors
and require to opt for a joint-venture route to enter the Indian market.

ADVANTAGES OF JOINT VENTURE

• Both partners can leverage their respective expertise to grow and expand within a chosen
market
• The political risks involved in joint-venture is lower due to the presence of the local
partner, having knowledge of the local market and its business environment
• Enables transfer of technology, intellectual properties and assets, knowledge of the
overseas market etc. between the partnering firms
 DISADVANTAGES OF JOINT VENTURE

• Joint ventures can face the possibility of cultural clashes within the organisation due to
the difference in organisation culture in both partnering firms
• In the event of a dispute, dissolution of a joint venture is subject to lengthy and
complicated legal process.

STRATEGIC ACQUISITIONS

Strategic acquisition implies that the company acquires a controlling interest in an

existing company in the overseas market.

This acquired company can be directly or indirectly involved in offering similar products
or services in the overseas market.

One can retain the existing management of the newly acquired company to benefit from
their expertise, knowledge and experience while having your team members positioned in
the board of the company as well.

ADVANTAGES OF STRATEGIC ACQUISITIONS

• The business does not need to start from scratch as one can use the existing infrastructure,
manufacturing facilities, distribution channels and an existing market share and a
consumer base.
• The business can benefit from the expertise, knowledge and experience of the existing
management and key personnel by retaining them.
• It is one of the fastest modes of entry into an international business on a large scale.

DISADVANTAGES

• Just like Joint Ventures, in Acquisitions as well, there is a possibility of cultural clashes
within the organisation due to the difference in organisation culture.
• Apart from that there mostly are problems with seamless integration of systems and
process. Technological process differences is one of the most common issues in strategic
acquisitions.

WHOLLY OWNED SUBISIDIARY OR GREEN FIELD VENTURING

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.
 ADVANTAGES

Gain local market knowledge

It can be seen as insider who employs locals

Maximum control

DISADVANTAGES

High cost.

High risk due to unknowns

Slow entry due to setup time

PORTFOLIO INVESTMENTS

Portfolio investments do not require the physical presence of a firm’s personnel or

products on foreign shores. These investments can be made in the form of marketable
securities in foreign markets, such as notes, bonds, commercial paper, certificates of
deposit, and non-controlling shares of stock. They can also be investments in foreign
bank accounts or as foreign loans.

Investors make decisions to acquire securities or invest money abroad for several reasons:

• To diversify their portfolios among markets and locations

• To achieve higher rates of return
• To avoid political risks by taking their investments out of the country
• To speculate in foreign exchange markets.

Portfolio investments can be made either by individuals or through special investment

funds.