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o Firm strategy, structure, and rivalry

 Different nations are characterized by different management ideologies, which can
either help or hurt them in building competitive advantage
 If there is a strong domestic rivalry, it helps to create improved efficiency, making
those firms better international competitors

Unit - II

MODES OF ENTRY INTO INTERNATIONAL BUSINESS

Mode of Entry – Exporting – Licensing – Franchising – Contract Manufacturing – Turn

Key Projects – Foreign Direct Investment – Mergers, Acquisitions and Joint Ventures –
Comparison of different modes of Entry.

Modes of entry into an International Business:-

There are some basic decisions that the firm must take befor forien expansion like: whichmarkets
to enter, when to enter those markets, and on what scale.
Which foreign markets?
-The choice based on nation’s long run profit potential.-Look in detail at economic and political
factors which influence foreign markets.-Long run benefits of doing business in a country
depends on following factors:- Size of market (in terms of demographics)- The present wealth of
consumer markets (purchasing power)- Nature of competitionBy considering such factors firm
can rank countries in terms of their attractiveness andlong-run profit.
Timing of entry:-
It is important to consider the timing of entry.Entry is early when an international business enters
a foreign market before other foreignfirms. And late when it enters after other international
businesses.The advantage is when firms enters early in the foreign market commonly known as
first-mover advantages
First mover advantage;-
1. it’s the ability to prevent rivals and capture demand by establishing a strong brandname.2.
Ability to build sales volume in that country.so that they can drive them out of market.3. Ability
to create customer relationship
Disadvantage:

1. firm has to devote effort, time and expense to learning the rules of the country.

2.risk is high for business failure(probability increases if business enters a nationalmarket after several other firms
they can learn from other early firms mistakes)

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Modes of entry:--
1. Exporting
2. Licensing
3. Franchising
4. Turnkey Project
5. Mergers & Acquisitions
6. Joint Venture
7. Acquisitions & Mergers
8. Wholly Owned Subsidiary

1.Exporting

:It means the sale abroad of an item produced ,stored or processed in the supplying firm’s home
country. It is a convenient method to increase the sales. Passive exporting occurs when a firm
receives canvassed them. Active exporting conversely results from a strategic decision to
establish proper systems for organizing the export functions and for procuring foreign sales.

Advantages of Exporting

a. Need for limited finance ;If the company selects a company in the host country to distribute the
company can enter international market with no or less financial resources but this amount would
be quite less compared to that would be necessary under other modes.
b.Less Risks ;Exporting involves less risk as the company understand the culture ,customer and
the market of the host country gradually. Later after understanding the host country the company
can enter on a full scale.
c.Motivation for exporting :Motivation for exporting are proactive and reactive. Proactive
motivations are opportunities available in the host country. Reactive motivators are those efforts
taken by the company to export the product to a foreign country due to the decline in demand for
its product in the home country.2.

2.Licensing :

In this mode of entry ,the domestic manufacturer leases the right to use its intellectual property
(ie) technology , copy rights ,brand name etc to a manufacturer in a foreign country for a fee.
Here the manufacturer in the domestic country is called licensor and the manufacturer in the
foreign is called licensee. The cost of entering market through this mode is less costly. The
domestic company can choose any international location and enjoy the advantages without
incurring any obligations and responsibilities of ownership, managerial, investment etc.
Advantages
;1. Low investment on the part of licensor.2. Low financial risk to the licensor 3. Licensor can
investigate the foreign market without much efforts on his part.4. Licensee gets the benefits with
less investment on research anddevelopment5. Licensee escapes himself from the risk of product
failure.

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Disadvantages
1. It reduces market opportunities for both
2. Both parties have to maintain the product quality and promote the product . Therefore one
party can affect the other through their improper acts.
3. Chance for misunderstanding between the parties.
4. Chance for leakages of the trade secrets of the licensor.5. Licensee may develop his
reputation6. Licensee may sell the product outside the agreed territory and after theexpiry of the
contract.

3.Franchising
Under franchising an independent organization called the franchisee operates the business under
the name of another company called the franchisor under this agreement the franchisee pays
a fee to the franchisor. The franchisor provides the following services to the franchisee.
1. Trade marks
2. Operating System
3. Product reputation
4. Continuous support system like advertising ,
employee training ,reservation services quality assurances program etc.
Advantages:
1. Low investment and low risk
2. Franchisor can get the information regarding the market culture, customs and
environment of the host country.
3. Franchisor learns more from the experience of the franchisees.
4. Franchisee get the benefits of R& D with low cost.
5. Franchisee escapes from the risk of product failure.

Disadvantages:1. It may be more complicating than domestic franchising.

2. It is difficult to control the international franchisee.
3. It reduce the market opportunities for both
4. Both the parties have the responsibilities to maintain product quality and product promotion.
5. There is a problem of leakage of trade secrets.
4.Turnkey Project
:A turnkey project is a contract under which a firm agrees to fully design , construct and equip a
manufacturing/ business/services facility and turn the project over to the purchase when it is
ready for operation for a remuneration like a fixed price , payment on cost plus basis. This form
of pricing allows the company to shift the risk of inflation enhanced costs to the purchaser. Eg
nuclear power plants , airports, oil refinery , national highways , railway line etc. Hence they are
multiyear project.

5.Mergers & Acquistions

:A domestic company selects a foreign company and merger itself with foreign company in order
to enter international business. Alternatively the domestic company may purchase the foreign

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company and acquires it ownership and control. It provides immediate access to international
manufacturing facilities and marketing network.

Advantages
1. The company immediately gets the ownership and control over the acquired firm’s factories,
employee, technology ,brand name and distribution networks.
2. The company can formulate international strategy and generate more revenues.
3. If the industry already reached the stage of optimum capacity level or overcapacity level in the
host country. This strategy helps the hostcountry.
Disadvantages:
1. Acquiring a firm in a foreign country is a complex task involving bankers, lawyers regulation,
mergers and acquisition specialists fromthe two countries.
2. This strategy adds no capacity to the industry.
3. Sometimes host countries imposed restrictions on acquisition of localcompanies by the foreign
companies.4. Labour problem of the host country’s companies are also transferred tothe acquired
company.

6.Joint Venture
Two or more firm join together to create a new business entity that islegally separate and distinct
from its parents. It involves shared ownership. Various environmental factors like social ,
technological economic and political encourage the formation of joint ventures. It provides
strength in terms of required capital. Latest technology required human talent etc. and enable the
companies to share the risk in the foreign markets. This act improves the local image in the host
country and also satisfies the governmental joint venture.
Advantages
1. Joint venture provide large capital funds suitable for major projects.
2. It spread the risk between or among partners.
3. It provide skills like technical skills, technology, human skills ,expertise , marketing skills.
4. It make large projects and turn key projects feasible and possible.
5. It synergy due to combined efforts of varied parties.
Disadvantages:
1. Conflict may arise
2. Partner delay the decision making once the dispute arises. Then theoperations become
unresponsive and inefficient.
3. Life cycle of a joint venture is hindered by many causes of collapse.
4. Scope for collapse of a joint venture is more due to entry of competitors changes in the
partners strength.
5. The decision making is slowed down in joint ventures due to the involvement of a number of
parties.

7.Acquisitions & Mergers

:A mergers is a voluntary and permanent combination of business whereby one or more firms
integrate their operations and identities with those of another and henceforth work under a
common name andin the interests of the newly formed amalgamations.
Motives for acquisitions

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1. Removal of competitor
2. Reduction of the Co failure through spreading risk over a wider range of activities.
3. The desire to acquire business already trading in certain markets & possessing certain
specialist employees &equipments.
4. Obtaining patents, license & intellectual property.
5. Economies of scale possibly made through more extensive operations.
6. Acquisition of land, building & other fixed asset that can be profitably sold off.
7. The ability to control supplies of raw materials.
8. Expert use of resources.
9. Tax consideration.
10. Desire to become involved with new technologies &management method particularly in high
risk industries.
8. Wholly Owned Subsidiary
Subsidiary means individual body under parent body. This Subsidiary or individual body
as per their own generates revenue. They give their own rent, salary to employees, etc.
But policies and trademark will be implemented from the Parent body. There are no branches
here. Only the certain percentage of the profit will be given to the parent body.
A subsidiary, in business matters, is an entity that is controlled by a bigger and more
powerful entity. The controlled entity is called a company, corporation, or limited liability
company, and the controlling entity is called its parent (or the parent company). The reason for
this distinction is that alone company cannot be a subsidiary of any organization; only an entity
representing affections a separate entity can be a subsidiary.
While individuals have the capacity to act on their own initiative, a business entity can
only act through its directors, officers and employees. The most common way that control of a
subsidiary is achieved is through the ownership of shares in the subsidiary by the parent.
These shares give the parent the necessary votes to determine the composition of the board of the
subsidiary and so exercise control. This gives rise to the common presumption that 50% plus
one share is enough to create a subsidiary. There are, however, other ways that control can come
about and the exact rules both as to what control is needed and how it is achieved can
be complex (see below).
A subsidiary may itself have subsidiaries, and these, in turn, mayhave subsidiaries of
their own. A parent and all its subsidiaries together are called a group, although this term
can also apply to cooperating companies and their subsidiaries with varying degrees of shared
ownership. Subsidiaries are separate, distinct legal entities for the purposes of taxation and
regulation. For this reason, they differ from divisions, which are businesses fully integrated
within the main company, and not legally or otherwise distinct from it.Subsidiaries are a
common feature of business life and most if not all major businesses organize their operations in
this way. Examples include holding companies such as Berkshire Hath away, Time Warner ,
or Citi group as well as more focused companies such as IBM, or Xerox Corporation. These, and
others, organize their businesses into national or functional subsidiaries, sometimes with multiple
levels of subsidiaries.

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