Modes of Entering in International Business

Global market offers tremendous opportunity in the backdrop of liberalisation

and ever increasing free market economies in the world. The conditions prior
to 1990 were not conducive to integration of global markets as national
economies were relatively self-contained entities. A fundamental shift has
occurred in the world economy during the last two decades. The barriers to
cross border trade and investment have considerably declined, technology
advances in aviation and communication have almost nullified the distance
between markets, material culture is appearing to look similar all over the
world due to steady cultural change and national economies are getting
integrated in to one single global market.

During the period of liberalisation, world trade organisation came in to

existence as a result of continued effort of countries to form an international
trade organisation. Consequently, international trade procedure which was
earlier extremely cumbersome has become simpler and considerably easier.
The volume of goods, services and investments crossing national boundaries
has expanded. The world liquidity has improved as effective guidance and
support is provided by International Monetary Fund (IMF) to member nations,
with regard to the foreign exchange reserve management by each country.
World liquidity is measured in terms of aggregate of foreign exchange reserve
of nation states in the world.
As opportunities for trade is increasing, more and more players are attempting
to enter world markets. There has been steady flow of foreign investment to
countries which have liberalised their economy by dismantling excessive
restrictions. Sourcing of funds also has multiple avenues and interest rates
are decided by market forces. Alongside economic integration, the world is
experiencing the integration of financial industry, all facilitating international
trade.
The world trade is now experiencing intense competition among various
nations to secure a higher share of business. India’s market share of
international business has still not crossed one percent of world trade,
notwithstanding the new initiatives in terms of ‘foreign trade policy 2009–
2014’.
Market Entry Strategies
The liberalisation or the globalisation does not mean that the art of conducting
the business has become easy. The business is complex and more so when
it is international in scope. Hence most of the business enterprises do not
think in terms of going international.
One of the important pre-requisites while going for international business is
the conviction and the level of commitment of business firms in that direction.
Most of the business firms pass through certain stages before finally settling
in international business. Generally, except perhaps the large business
houses, others do not resort to direct export or import, to begin with. Exports
or imports are made through other business houses who are settled in that
trade. During this time these business enterprises gain experience in
international trade. However, the product manufactured and sold in the
international market through an export house will not naturally create brand
name for their product internationally. Many a times the product may be
repacked to suit international requirement or it may bear the exporter’s name
over the original manufacturer’s name. In this type of export, there is no direct
involvement of the manufacturer of the product.
Sometimes there may be a temporary involvement of the manufacturer in
international business. This may be primarily induced by circumstances like
an unexpected demand by a foreign buyer or foreign buyer’s agent in the
country. In this case, the level of commitment is not that high, it is only to
satisfy an unexpected export demand and not to expand sales or capture the
foreign market.
There are occasions when a business enterprise is holding surplus finished
product in view of sluggish domestic demand and in such an event there may
be temporary involvement in international trade. If there is a stray case of
indigenous non-availability of raw material, the manufacturer user may import
raw material as a one-time measure. These types of international marketing
are of temporary involvement by domestic business firms, where the level of
commitment for international trade is low or not serious.
The level of commitment is high in certain business firms, as they become
serious to commence international business, but have not started yet. These
firms are contemplating on the type of market, cultural similarities of such
markets, probable volume of trade and its implication on the firm. They are
identifying target customers and communicating with the foreign buyers and
agents for distribution of products.
The level of commitment is full in business enterprises which have crossed
the borders and have attained the status of multi-national companies. These
business enterprises are totally involved and are trying to do business with
most of the countries of the world.
In terms of level of orientation, the progressive evolution can be compared to
EPRG model – ethnocentric, polycentric, Regio-centric and geocentric while
business firms finally attain global presence. To begin with, products are sold
in a particular region of the country and as marketing expands, sales takes
place many regions of the country.Once domestic markets are saturated,
firms try to sellin contiguous nations in the continent and finally they attempt
for global sales.
As business enterprises transcend national boundaries of many countries
they need to be slow and steady in that process for reasons that the
international business is risky. It is pertinent to examine the six models of
market entry for a domestic firm.
1. The first model of market entry is appointing agents in foreign markets,
getting business query and responding suitably to those queries.
2. The second model is opening an overseas office for business promotion.
3. The third model is having a licensing arrangement with a foreign firm,
providing license and technology, in which case financial investment will
be by that company and production and distribution right against payment
of royalty. This helps the business enterprise to move from overseas office
to other potential markets to expand sale of products.
4. The fourth model is franchising arrangement with a foreign firm against
receipt of certain fee.
5. The fifth model is to have strategic alliance with another firm.
6. The sixth model is brown field strategy or green field strategy as the case
may be to become multi-national and finally acquire the status of global
company.In a period of liberalisation, privatisation and globalisation, most
of the governments of nation states are promoting industrialisation. Apart
 from this, advantages of local factors of production and cost of
components available locally are useful to the companies going
international.
Most of these models of entry are discussed in detail in the ensuing
paragraphs of this unit.

Exporting and Importing

Exporting is also one of the international market entry strategies in which
goods are sold and services are provided beyond the boundaries of a nation.
Exports play a very crucial role in a developing economy and they are given
utmost priority in the foreign trade policy of such an economy. Exports can be
of two types – direct exports and indirect exports. Exports increase sales
volume and also increases clientele base. Direct exports enhance the brand
equity as the product enters foreign markets and purchased by foreigners at
different markets. In direct exports, merchant exporter or manufacturer
exporter deals directly with the foreign importer. Direct exporter receives the
export order in his name and thereafter executes the export order in his name.
Traders and manufacturers, who do not have requisite expertise in exports,
opt for supplying goods to export houses or business enterprises which have
good track record in exports. Also, getting export orders from global markets
is not easy for the beginners in a situation of fierce competition from various
sections. Business firms which are new to foreign trade have to develop
confidence while dealing with foreign buyers whom they have not seen and
not made any personal discussion with. These foreign buyers are called non-
face to face customers and at times pose tremendous risk in terms of export
value realisation.
In the international arena, there are business agents or middlemen who
identify target group of customers and establish liaison with the global
suppliers.
With the advent of information technology and its continued evolution there
are some easy and cost effective methods of entering global markets. Even
a beginner in international trade can explore some easy methods of market
entry. As a first step, the business firm intending to export should develop a
profile of the product and post it on the website for public information. The
information posted on the website must contain distinctive features of the
product to attract export order. Simultaneously, the exports can also be
explored through entering in to business partnerships with foreign
distributors for reciprocal business advantages. Another
step in commencing export sale is by communicating directly with the end
user of the product, for which a data base of the target customers abroad
should be created. All the three processes of going international will not cost
much to the beginners in foreign trade, except that planning the strategies
need to be crisp.
Import is another area of foreign trade, but unlike export, import is not the
priority area of most of the countries. Export is promoted to build up foreign
exchange reserve and if the reserve is above the comfort level of the
importing country, many restrictions are not imposed.
Countries exercising exchange control generally regulate imports and one of
the methods of restricting imports is through licensing. Imports are permitted
by such countries only when a particular commodity is essential for the
economic progress and the same is indigenously not available.
In the liberalised regime there is enough opportunity for import trade as
emerging market economies and developing countries have reasonable
accumulation of foreign exchange reserve. At times, international markets
make available better quality goods and services with lesser cost than the
domestic markets. It is worthwhile exploiting this favourable situation and
import goods and service from international markets than procure from
domestic market. The import and export procedure are progressively
simplified and restrictions are coming down. Today, most of the import items
are in freely permissible category called open general license. When both
external economy and domestic economy of the country are strong,
international marketers have tremendous opportunity for foreign trade.

Licensing
Licensing: In licensing, the licensor(the firm which owns the rights) draws a
contractual arrangement with a licensee (the firm which wants to use the
rights) providing the right to use its intellectual property such as its brand
name, technology, work methods, company name, trademarks, patents and
copyrights for a particular business..

Role of licensing in internationalization

Licensing helpfirms to survive and compete within a rapidly changing
international industrial environment.
Licensing contract
The licensing contract defines the terms of agreement between a licensor and
a licensee. It is important that the contract adequately covers all the important
aspects of the relationship.Licensing contract normally includes the following:
1) Boundaries of the agreement: The first step in negotiating a licensing
contract is to specify the boundaries of the agreement, that is which rights
and privileges should be included in the agreement and which issues
should not be included.
2) Rights, privileges, constraints of the licensee and the licensor.
3) Dispute resolution mechanism in case any dispute arises. 4) Contract
duration for the licensing agreement.
Compensation: Compensation under a licensing agreement is called a
royalty. It can be a flat fee, a fixed amount per unit sold, or a percentage of
sales of the licensed product or service.
Licensing risks
It is important that both the licensee and the licensor understand the risks
involved in any such agreement so that steps are taken to avoid any issue
that might arise in future. Key issues that a licensing association may face
are the following:
• limiting market opportunities for the licensor and the licensee if they both
agree to work with each other and not with any other firm in similar
business
• the licensor may be creating a future competitor in form of the licensee
• loss of control of technology by the licensor as information and rights of
use are allowed to the licensee
• minimum performance by licensee may be agreed in the contract, but in
reality the potential for the business may be much larger in the market –
 licensee may opt to just achieve the minimum performance to fulfil the
contractual obligations
• misuse of trademarks by the licensee.
Critical success factors of licensing:
In the following are the critical success factors of a licensing agreement:
• avoiding licensing arrangements with any firm that could become future
competitor
• protecting trade
• specifying compensation practices for breaching agreement
• setting standards for performance, quality
• carefully selecting and evaluating prospective licensee •
maintaining long term relationship with licensee.
Joint venture
A joint venture is a mutual effort of two or more business organisations. It
aims at mutual financial benefits from an activity. Various countries like India
and the People's Republic of China have made it compulsory that foreign
investment in those countries should be through joint ventures. Joint ventures
have more control exerted when compared to exporting. However, it also has
high levels of risk.
A joint venture is a business agreement where business entities comply to
create a new company and assets by contributing entity for a definite period.
They have control over the company and share the expenses, revenues and
assets JV limited by guarantee, JV limited with partners holding shares are
other types of joint ventures companies. A short-term partnership in which
two or more people join to execute a certain project is also a joint venture and
the parties are called ‘co-venturers’.
A JV can be for one specific project which is referred to as a consortium (as
the building of the Channel Tunnel) or an on-going business sounds. In a
consortium JV, one party takes the technological skill or technical service
arrangements, management contracts, franchise and brand use agreements
and rental agreements for one-time contracts. Once the goal is reached, the
JV is dissolved. Dow Corning, MillerCoors, Sony Ericsson and Penske Truck
Leasing are some of the major JVs.
In a JV, two or more parties come together to start a project. Both parties
equally invest time, finance and energy to build the project. Though most JVs
are normally small projects, large establishments use this concept for
diversification. A joint venture ensures success for both start-ups and
established organisations. As there is a high cost involved in starting a
business, a JV enables both the parties involved to share the expense as well
as the resulting profit.
A joint venture should not be given a casual approach. Any business person
involved in a JV needs to be dedicated and eager to cooperate with the other
parties involved. Individual business decisions cannot be taken for the
business. There has to be 100% commitment from both sides to make the
business a success.
Before initiating a JV, It is important to confirm that both parties involved
match the projected client base and complement each other.
Misunderstandings or less communication can destroy a JV. Thus
communication is the key element for both parties to set their expectations
right and what they can offer for the project.
It is important to have a strategic plan in place for a JV as there is huge money
involved. In other words, both parties must commit to focus on the future of
the venture and not just the immediate returns. Both long term and short term
achievements are important. The key elements to achieving this success in a
JV are integrity, communication and honesty with the organisation

Mergers & Acquisitions

Mergers and acquisitions signify an ultimate change in a business. It is a very
challenging, difficult and confusing event. However, in today’s business
world, it has become a normal. Mergers are, at times, the only mode of
survival for most companies in the global, competitive business world. In other
cases like Cisco systems, mergers are a vital component in planning a long-
term growth. Moreover, most businesspersons aim at building companies for
short term anticipating to sell the company for huge profits in the long run.
‘Merger’ refers to the merging of two business entities where one new
business will exist. ‘Acquisition’ refers to one company procuring the assets
of another company where both companies may continue to exist. Mergers
and acquisitions (M&A) is widely referred to as a business transaction in
which one business is acquired by another business. The acquiring company
continues in business while the acquired company (Target Company) is
integrated into the acquiring company. Thus the acquired company does not
exist after the merger.

Strategic Alliances
International firms can cooperate in various forms such as sharing production
facilities, licensing proprietary technology, co-funding research projects and
using existing distribution networks to promote each other’s products. These
methods of cooperation are known as strategic alliances. It is a business
arrangement in which two or more business entities mutually cooperate for
their benefit.
Thus a strategic alliance is formed for the mutual benefits of a long-term
formal relationship between two or more business parties. It helps to pursue
a set of agreed goals or meet a critical business need while both
organisations remain independent. Here, two or more companies comply to
cooperate to conduct a business activity and each company brings in different
strengths and abilities to the arrangement

The following are the benefits of strategic alliance:

• increase in capital for research and product development and yet lower
risk (Innovation)
• lesser product lead times and life cycles (time pressures)
• ability to combine complementary skills and assets which cannot be easily
developed by either company
• access to information and proficiencythat is beyond the borders of the
company (technology transfer)
• rapid accomplishment of scale, critical mass and momentum
(Economies of Scale - bigger is better)
• expansion of channel and international market presence (enter a foreign
market)
• creatingintegrity and awareness of brand in the industry
• offeringcustomers extra value
• creating technological standards for the industry which willbe beneficial
for the organisation.
There are various types of strategic alliances. This includes a wide range of
cooperation – fromcontractual to equity forms.

Franchising
In franchising, a contractual agreement is set up in which an organisation
(franchiser) trades the right to use its intellectual property (patents, brand
names, copyrights, company name, technology, work methods and
trademarks) to another organisation (the franchisee) for a particular fee. The
franchiser assists and/or exercises a significant amount of control over the
way the franchisee functions.
Types of franchise agreements:
• Product/trade name franchises – the product is distributed in a particular
territory or place using the manufacturer’s trademark.
• Car dealerships, petrol service stations, soft-drink bottles.
• Business format franchises – the licensing of a trademark for business is
incorporated in a particular territory along with an entire system to conduct
a business. Almost 75% of all franchise businesses are of this model.
Some examples are McDonalds, KFC, Body shop, Giordano concept
shops, etc.
Franchising strategies for rapid growth in international markets:
• Single-unit franchising – the right to operate a single unit within a defined
territory is granted to an individual franchisee by the franchiser.
• Multi-unit franchising – the franchiser grants the franchisee the right to
operate more than one franchise
• Conversion franchising – an existing business is acquired and converted
into a franchise
• International franchising – it mostly involves “Master Franchising” and
joint-ventures
• Creative franchising – it includes various things like money-back
guarantees, stock ownership and to the use of sophisticated management
techniques.
Key considerations in franchising
• There must be a sound and cohesive franchising package which adapts
to environment of target country
• The franchiser should be continually able to provide value to franchisees
• There should be sufficient financing
• Franchisees should be carefully selected
• Strong cordial relationships should be built with franchisees •
Continuous support should be provided to franchisees
• It should comply with foreign regulations.
Financial contribution, knowledge of the local scenario, motivation of the
franchisee and lesser risks are the advantages to the franchiser. The
disadvantages include lack of ultimate control, higher demands of training,
protecting the intellectual property, creating potential competitors, misusing
the rights of the franchise and less profitability.

Contract Manufacture
A firm which markets and sells products to international markets might
arrange for a local manufacturer under contract to produce the product for
them.
Examples include firms like Nike and Gap, both of whom use contract clothing
and shoe manufacturing in lower labour cost countries. The advantage of
arranging contract manufacturing is that it allows the firm to concentrate on
its sales and marketing activities.As investment is kept to minimum, it makes
withdrawal easy and less costly if the product proves to be unsuccessful.
Contract manufacture might be necessary to overcome trade barriers and
sometimes it is the only way to gain entry in to a country in which the
government attempts to secure local employment by insisting on local
production.
If political instability makes foreign investment unwise, this may be the best
way of achieving a marketing presence, without having the risk of large
investment in manufacturing.The disadvantage of contract manufacture as an
entry method is that it does not allow buyer control over the manufacturer’s
activities.
In the brewing industry there are a variety of arrangements where brewers
contract the manufacture of beer brands, but other market entry methods are
used by the beer brand owners to increase market share.
Consignment Sales
When the exporter is initially getting a feel of the markets and is trying to tap
the customers, he would need to hold the stocks at hand so that he is able to
offer immediate delivery to the new customers and help bag orders.
In such cases the exporter will use a consignment agent who will import and
hold the consignment on behalf of the exporter. Once the orders are received
and the consignment is delivered, the consignment agent will receive
payment from the customer and in turn repatriate the amount received back
to the exporter after keeping the agreed amount of margin as per his
agreement. In such cases the stocks are owned by the exporter until it is
invoiced by the consignment agent to the customer. The consignment agent
only acts as a custodian of goods and does not carry any other ownership.
He provides a legal entity for the exporter to send goods to the foreign country
and manages the supply chain services as per instructions of the exporter.
The entire responsibility, risk including marketing, pricing, collections and
liquidation of stocks lies with the exporter.

Summary
Business enterprises always intend to expand tentacles beyond their
traditional geographical limits and a few contemplate moving beyond the
boundaries of the nation. While planning strategies for going international it
is necessary for business enterprises to understand the attendant risk and
opportunities for marketing of products in global markets. All aspects of
business pertinent to a particular market in the globe have to be critically
analysed. Accordingly, approach of international market entry should be
devised and employed to achieve a desired success in business. In a foreign
direct investment, it is necessary to take a decision on whether the approach
should be brown field strategy or green field strategy.
In the case of exports, beginners may resort to indirect exports through
recognised export houses or star trading houses, so that risk of dealing with
a non-face to face buyer abroad is reduced. Once enough experience is
gained and client base is established direct export may be contemplated.
While most of the countries promote exports, in the liberalised regime there
is enough scope for import business. Hence international market entry may
be made through import trade. The other modes of market entry are through
licensing, forming joint ventures, mergers, acquisitions, strategic alliances,
turnkey operations, franchising, contract manufacture, and strategic
marketing and consignment sales. While associating with any foreigner or a
company incorporate abroad, it is essential to analyse the counter party’s risk.
These counter party risks vary from customer to customer or from country to
country.
Entry into international markets for promoting sale of products is essential for
any expanding business firm. In the era of liberalisation, circumstances are
conducive for international marketers to widen the customer base and
increase sale. There is scope for developing global brands of products by
various strategies of market entry and exploitation of facilities provided by
nation states around the globe.