Module 2

Modes of entry into International Business

Notes

Students should be able to evaluate various modes of entry in to

international business and should be able to select the best mode
of entry given a situation.

MBA Semester 2
Course – International Business

Topics Covered
1. Modes of entry into International Business
2. Internationalization process
3. International business approaches: ethnocentric, polycentric, regiocentric, geocentric.
4. Managerial implications case studies related to internationalization process.

IB Notes – Compiled by Prof. Abdul Karim

 Module – 2
Modes of entry into international business
International business refers to the trade of goods, services, technology, capital,
and/or knowledge across national borders and at a global scale.
It involves cross-border transactions of goods and services between two or more
countries. Transactions of economic resources include capital, skills, and people for
the purpose of the international production of physical goods and services such as
finance, banking, insurance, and construction.
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.
Modes of entry into international business
• Exporting
• Licensing
• Franchising
• Mergers & Acquisitions
• FDI
• Joint venture
• Contract manufacturing
• Strategic Alliance
• Turnkey Projects
Exporting
It is the process of selling goods and services produced in one country to other
countries. Exporting may be direct or indirect.
Direct export – A company capitalizing on economies of scale in production
concentrated in the home country, establishes a proper system for organizing export
functions and procuring foreign sales.
Indirect export - involves exporting through domestically based export
intermediaries. The exporter has no control over his product in the foreign market.

IB Notes – Compiled by Prof. Abdul Karim

Advantages
• It helps in the distribution of surplus.
• It is less risky.
• Under direct export, the exporter has control over the selection of market.
• It helps in fast market access.
Disadvantages
• High start-up cost in case of direct exports.
• In Indirect export, the exporter has no control over the distribution of
products.
• Exporting through export intermediaries increase the cost of the product.
Licensing
Licensing is a method in which a firm gives permission to a person to use its legally
protected product or technology and to do business in a particular manner, for an
agreed period of time and within an agreed territory. It is a very easy method to
enter foreign market as less control and communication is involved.
Example: Starbucks (licensor) and Nestle (licensee) for exclusive rights to sell
Starbuck’s product, Microsoft Office Licenses.
Advantages
• Less investment is involved.
• Low cost of labour.
• 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
• This method is time-consuming.
• Decline in product quality may harm the reputation of licensor.
• Limited opportunities for both parties involved.
• 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. In franchising, the franchisee has to

IB Notes – Compiled by Prof. Abdul Karim

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.

Example: Burger king, McDonald, Dunkin Doughnuts, Subway.

Advantages
• It is less risky.
• Advantage of expertise of franchiser.
• Highly motivated employees.
• 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
• Difficulty in keeping trade secrets.
• Franchisee may become a future competitor.
• A wrong franchisee may ruin company’s name and goodwill.
• Responsibilities of managing product quality and product promotion for both.
• Leakage of trade secrets

Merger & Acquisition

A merger is a combination of two or more district entities into one, the desired effect
being accumulation of assets and liabilities of distinct entities and several other
benefits such as economies of scale, tax benefits, fast growth, synergy, and
diversification, etc. The merging entities cease to be in existence and merge
into a single servicing entity.

Example: Vodafone and Idea formed a new company VI, Pixar and Disney Merger

Acquisition implies the acquisition of controlling interest in a company by another

company. It does not lead to dissolution of company whose shares are acquired. It
may be a friendly or hostile acquisition.

Example: LIC Acquire IDBI Bank, Microsoft Acquisition of Nokia, HDFC Bank
Acquisition of Centurion Bank of Punjab.

IB Notes – Compiled by Prof. Abdul Karim

Advantages
• Low cost of production.
• Development of medium and small-scale industries.
• Immediate ownership and control over the acquired firm’s assets.
• Probability of earning more revenues.

Disadvantages
• Difficulty in maintaining quality standards.
• Local manufacturers in foreign market may lose business.
• Complex process and requires experts from both countries.

FDI
It is a mode of entering foreign market through investment. Investment may be
direct or indirectly through financial institutions. FDI influences the investment
pattern of the economy and helps to increase overall development. The extent to
which FDI is allowed in a country is subjected to the government regulations of
that country.
Advantages
• Modifications can be made at any point of time.
• It is an easy mode of entry.
Disadvantages
• The government policies may not be helpful.
• The return on investment may be low.
Joint Venture
It is a strategy used by companies to enter a foreign market by joining hands and
sharing ownership and management with another company. It is used when two
or more companies want to achieve some common objectives and expand
international operations.

SONY-ERICSSION is a joint Venture by the Japanese Electronics Company SONY

Corporation and Swedish Telecommunications Company ERICSSION to make
mobile phones.
Advantages
• Optimum use of resources.

IB Notes – Compiled by Prof. Abdul Karim

 • Partners are able to learn from each other.
• 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 over asymmetric investment.
• Cultural and political stability may pose a threat to successful operations.
• Conflicts in management.
• 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.
Contract Manufacturing
When a foreign firm hires a local manufacturer to produce their product or a part
of their product it is known as contract manufacturing. This method utilizes the
skills of a local manufacturer and helps in reducing cost of production. The
marketing and selling of the product are the responsibility of the international firm.
Example: Foxconn Technology (Local manufacturer) group that supplies product
to high profile companies like Microsoft. Apple and Amazon
Advantages
• Low cost of production.
• Development of medium and small-scale industries.
• No dilution of control.
Disadvantages
• Difficulty in maintaining quality standards.
• Local manufacturers in foreign market may lose business.

Strategic Alliance
It is a voluntary formal agreement between two companies to pool their resources
to achieve a common set of objectives while remaining independent entities. It is
mainly used to expand the production capacity and increase market share for a
product. Alliances help in developing new technologies and utilizing brand image
and market knowledge of both the companies.
Example: Apple Pay and Master Card.

IB Notes – Compile by Prof. Abdul Karim

Turnkey Projects
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.

Internationalization Process
Internationalization describes designing a product in a way that it may be readily
consumed across multiple countries.

This process is used by companies looking to expand their global footprint beyond
their own domestic market understanding consumers abroad may have different
tastes or habits.

Internationalization often requires modifying products to conform to the technical

or cultural needs of a given country, such as creating plugs suitable for different
types of electrical outlets.

Stage-1 • Domestic Operations

The firm’s market is exclusively domestic.
Most international companies have their origin as domestic companies. These
companies focus on domestic operations only.
Example: Patanjali have currently its major operations in India only.

Stage-2 • Export Operations

The firm expands its market by engaging into export operations and offering the
domestic products to other countries also, but retains production facilities within
domestic borders.
Example: Indian firms exporting textiles, jute, spices, nuts, rice all around the
world.

Stage-3 • Subsidiaries or Joint Venture

The firm physically moves some of its operations out of the home country. There is
a mutual cost, profit sharing and management in such method.
Example: A joint venture between Maruti (Indian Company) and Suzuki (Japanese
Company).

Stage-4 • Multinational Operations

IB Notes – Compile by Prof. Abdul Karim

The firm becomes the fully fledged multinational co. [MNC] with the assembly of
production facilities in several countries & regions of the world. Some
decentralization of decision making is common but many personnel decisions are
still made at corporate level in headquarters.
Example: Mc Donald’s is a MNC operating worldwide.

Stage-5 • Transnational Operations

In this the firms that reach this particular stage are often called transnational
companies because they achieve both global efficiency and local responsiveness.
They use global market and resources for their functioning.
Example: Coca-Cola, Nestle

Approaches of international business

• Ethnocentric
• Polycentric
• Regio centric
• Geocentric

Ethnocentric Approach
A means of disposing of surplus domestic production.
Foreign operations are conducted from a home country base-strong reliance on
export agents. Domestic product-mix without major modifications for the
overseas markets.
Cultural factors in foreign markets are overlooked for instance most Indian
handicrafts exporters hardly appreciated the market difference and need for
adaptation of marketing strategy.

A number of Indian products sold abroad such as dresses like salwar – kurta,
Sarees and food items such as Dosa mix, Idli mix Vada mix sambhar mix, Gulab
Jamun mix, Papad and Indian sweets are primarily targeted at Indian population
abroad
Home country marketing practices will succeed elsewhere without adaptation;
however, international marketing is viewed as secondary to domestic operations

Polycentric Approach
Polycentric approach is highly market oriented.
Each market is considered unique in terms of its market environment. Local
marketing techniques are best suited to deal with local market conditions.
Subsidies are established in foreign markets.
Environment of each market is considered while formulating marketing strategy

IB Notes – Compile by Prof. Abdul Karim

Regio centric Approach
Regio centric Company views different regions as different markets.
A particular region with certain important common marketing characteristics is
regarded as a single market.
Economies of scale. Strategy integration, organizational approach and product
policy tend to be implemented at regional level.
Depending the convergence of market behaviour on the basis of geographical
regions, a similar marketing strategy is used.

Geocentric Approach
A geocentric company views the entire world as a single market and develops
standardized marketing mix, projecting a uniform image of the company and its
products for the global market.
Geocentric orientation provides improved coordination and control.
Regio centric and Geocentric are synonymous with a Global Marketing Orientation
where a uniform, standardized marketing strategy is used for several countries,
countries in a region, or the entire world

Case study related to Internationalization process of an Indian Company

https://www.nomurafoundation.or.jp/en/wordpress/wp-
content/uploads/2014/09/20071113-14_Andrea_Goldstein-
PPT.pdf

IB Notes – Compile by Prof. Abdul Karim