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DIFFERENT MODES OF
ENTRY INTO
INTERNATIONAL BUSINESS
By
Rizwan
Dhanesh
Prathamesh
Different modes of entry
EXPORTING
-indirect exporting
-direct exports
-intra-corporate
transfers




SPECIAL MODES
-Contract
manufacturing
-Management
Contracts
-Turnkey projects

LICENSING




FDI without alliances



FDI with alliances

FRANCHISING
Forms of Exporting

Indirect
exporting

Direct
exporting

Intra-corporated
transfer
Forms of Exporting
4

 Indirect

involvement means that the firm
participates in international business
through an intermediary and does not
deal with foreign customers or markets.

 Direct

involvement means that the firm
works with foreign customers or markets
with the opportunity to develop a
relationship.
Indirect Exporting
Indirect Exporting – Eg.
16-6



Exporting of goods and services through
various home-based exporters
 Manufacturers’

export agents

 Export

commission agents

 Export

merchants

 International

firms
Direct Exporting
Intra-corporate Transfer
Exporting
Advantages
Relatively low
financial exposure

Permit gradual
market entry

Disadvantages

Vulnerability to
tariffs and NTBs

Logistical
complexities

Acquire knowledge
about local market
Potential conflicts
with distributors
Avoid restrictions on
foreign investment
Licensing


Licensing is when a firm, called the licensor,
leases the right to use its intellectual property—
technology, work methods, patents, copyrights,
brand names, or trademarks—to another firm,
called the licensee, in return for a fee.



The property licensed may include:
Patents
 Trademarks
 Copyrights
 Technology
 Technical know-how
 Specific business skills

The Licensing Process
Basic Issues in
International Licensing






Specifying the boundaries of the agreement
Determining compensation
Establishing rights, privileges, and constraints
Specifying the duration of the contract
Eg. Pepsico, Coke Bottling Plant
Licensing –Adv. & Disadv.
Advantages

Disadvantages

• Low financial risks
• Low-cost way to
assess market
potential
• Avoid tariffs, NTBs,
restrictions on foreign
investment
• Licensee provides
knowledge of local
markets

• Limited market
opportunities/profits
• Dependence on
licensee
• Potential conflicts
with licensee
• Possibility of creating
future competitor
Franchising
Under franchising, an independent organisation
called the franchisee operates the business
under the name of another company called the
franchisor.
 In such an arrangement the franchisee pays a
fee to the franchisor.
 Franchising is a form of Licensing but the
Franchisor can exercise more control over the
Franchisee as compared to that in Licensing.

Franchising Agreements










Franchisee has to pay a fixed amount and
royalty based on sales.
Franchisee should agree to adhere to follow
the franchisor’s requirements
Franchisor helps the franchisee in establishing
the manufacturing facilities
Franchisor allows the franchisee some degree
of flexibility.
Eg. McDonalds, Subway, KFC
Franchising- Adv. & Disadv.
Advantages

• Low financial risks
• Low-cost way to assess
market potential
• Avoid tariffs, NTBs,
restrictions on foreign
investment
• Maintain more control
than with licensing
• Franchisee provides
knowledge of local
market

Disadvantages

• Limited market
opportunities/profits
• Dependence on
franchisee
• Potential conflicts with
franchisee
• Possibility of creating
future competitor
Specialized Entry Modes
Contract manufacturing






Contract manufacturing is outsourcing entire or
part of manufacturing operations.
E.g.: pharmaceuticals, Personal Care products
etc
The iPad and iPhone, which are products from
Apple Inc., are manufactured in China by
Foxconn. Hence, Foxconn is a contract
manufacturer and Apple benefits from a lower
cost of manufacturing devices
Contract Manufacturing-Adv. &
Disadv.
Advantages

Disadvantages

• Low financial risks
• Minimize
resources devoted
to manufacturing
• Focus firm’s
resources on other
elements of the
value chain

• Reduced control
(may affect quality,
delivery
schedules, etc.)
• Reduce learning
potential
• Potential public
relations problems
Management Contract
A management contract is an agreement
between two companies whereby one
company provides managerial assistance,
technical expertise and specialised services
to the second company for a certain period
of time in return for monetary
compensation.
 Eg. Schools, sports facilities, hospitals,
office buildings, malls and large businesses
have on-site cafeterias, restaurants.

Management Contract

Advantages

Disadvantages

• Focus firm’s resources on
its area of contracts
• Minimal financial exposure

• Potential returns limited by
contract expertise
• May unintentionally transfer
proprietary knowledge and
techniques to contractee
Turnkey Project


A turnkey project is a contract under which
a firm agrees to fully design, construct and
equip a manufacturing/business/service
facility and turn the project over to the
purchaser when its ready for operation, for
a remuneration.
Turnkey Project
FDI without alliances
Companies enter the international market
through FDI , invest their money, establish
manufacturing and marketing facilities through
ownership and control.
Greenfield strategy- the term Greenfield refers to
starting of the operations of a company from
scratch in a foreign market.
Greenfield Strategy

Advantages

Disadvantages

•
•
•
•

Best site
Modern facilities
Economic development incentives
Clean slate

• Huge time and patience needed
• Expensive
• Comply with local and national
regulation
• Local workforce needed
• Strongly perceived as a foreign worker
FDI with strategic alliances
Strategic alliance is a cooperative and collaborative
approach to achieve the larger goals.
Role of alliances
 Many complicated issues are solved through
alliances
 They provide the parties each other’s strengths
 Helps in developing new products with the
interaction of 2 or more industries
 Meet the challenges of technological revolution.
 Managing heavy outlay
 Become strong to compete with a multinational
FDI with strategic alliances
Modes of FDI through alliances are:
 Mergers and acquisitions
 Joint ventures
Mergers and Acquisitions
Merger : The combining of two or more
companies, generally by offering the
stockholders of one company securities in the
acquiring company in exchange for the
surrender of their stock.
Acquisition : When one company takes over
another and clearly established itself as the new
owner, the purchase is called an acquisition.

HDFC Bank acquisition of Centurion Bank of
Punjab for $2.4 billion
Acquisition Strategy
Advantages
• Obtains control over the acquired firm
such as factories and brand names
• Integrate the mgt of the firm into its
overall international strategy

Disadvantages
• Assumes all the liabilities such as
financial and managerial
Joint Ventures




A joint venture is an entity formed between two
or more parties to undertake economic activity
together. The parties agree to create a new
entity by both contributing equity, and then they
share in the revenues, expenses, and control
of the enterprise.
Sony-Ericsson is a joint venture by the
Japanese consumer electronics company Sony
Corporation and the Swedish
telecommunications company Ericsson to
make mobile phones
Joint Ventures


Advantages:
 Benefit

from local partner’s knowledge.
 Shared costs/risks with partner.
 Reduced political risk.


Disadvantages:
 Risk

giving control of technology to partner.
 May not realize experience curve or location
economies.
 Shared ownership can lead to conflict
THANK YOU

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Modes of Entry into International Business

  • 1. DIFFERENT MODES OF ENTRY INTO INTERNATIONAL BUSINESS By Rizwan Dhanesh Prathamesh
  • 2. Different modes of entry EXPORTING -indirect exporting -direct exports -intra-corporate transfers   SPECIAL MODES -Contract manufacturing -Management Contracts -Turnkey projects LICENSING   FDI without alliances  FDI with alliances FRANCHISING
  • 4. Forms of Exporting 4  Indirect involvement means that the firm participates in international business through an intermediary and does not deal with foreign customers or markets.  Direct involvement means that the firm works with foreign customers or markets with the opportunity to develop a relationship.
  • 6. Indirect Exporting – Eg. 16-6  Exporting of goods and services through various home-based exporters  Manufacturers’ export agents  Export commission agents  Export merchants  International firms
  • 9. Exporting Advantages Relatively low financial exposure Permit gradual market entry Disadvantages Vulnerability to tariffs and NTBs Logistical complexities Acquire knowledge about local market Potential conflicts with distributors Avoid restrictions on foreign investment
  • 10. Licensing  Licensing is when a firm, called the licensor, leases the right to use its intellectual property— technology, work methods, patents, copyrights, brand names, or trademarks—to another firm, called the licensee, in return for a fee.  The property licensed may include: Patents  Trademarks  Copyrights  Technology  Technical know-how  Specific business skills 
  • 12. Basic Issues in International Licensing      Specifying the boundaries of the agreement Determining compensation Establishing rights, privileges, and constraints Specifying the duration of the contract Eg. Pepsico, Coke Bottling Plant
  • 13. Licensing –Adv. & Disadv. Advantages Disadvantages • Low financial risks • Low-cost way to assess market potential • Avoid tariffs, NTBs, restrictions on foreign investment • Licensee provides knowledge of local markets • Limited market opportunities/profits • Dependence on licensee • Potential conflicts with licensee • Possibility of creating future competitor
  • 14. Franchising Under franchising, an independent organisation called the franchisee operates the business under the name of another company called the franchisor.  In such an arrangement the franchisee pays a fee to the franchisor.  Franchising is a form of Licensing but the Franchisor can exercise more control over the Franchisee as compared to that in Licensing. 
  • 15. Franchising Agreements      Franchisee has to pay a fixed amount and royalty based on sales. Franchisee should agree to adhere to follow the franchisor’s requirements Franchisor helps the franchisee in establishing the manufacturing facilities Franchisor allows the franchisee some degree of flexibility. Eg. McDonalds, Subway, KFC
  • 16. Franchising- Adv. & Disadv. Advantages • Low financial risks • Low-cost way to assess market potential • Avoid tariffs, NTBs, restrictions on foreign investment • Maintain more control than with licensing • Franchisee provides knowledge of local market Disadvantages • Limited market opportunities/profits • Dependence on franchisee • Potential conflicts with franchisee • Possibility of creating future competitor
  • 18. Contract manufacturing    Contract manufacturing is outsourcing entire or part of manufacturing operations. E.g.: pharmaceuticals, Personal Care products etc The iPad and iPhone, which are products from Apple Inc., are manufactured in China by Foxconn. Hence, Foxconn is a contract manufacturer and Apple benefits from a lower cost of manufacturing devices
  • 19. Contract Manufacturing-Adv. & Disadv. Advantages Disadvantages • Low financial risks • Minimize resources devoted to manufacturing • Focus firm’s resources on other elements of the value chain • Reduced control (may affect quality, delivery schedules, etc.) • Reduce learning potential • Potential public relations problems
  • 20. Management Contract A management contract is an agreement between two companies whereby one company provides managerial assistance, technical expertise and specialised services to the second company for a certain period of time in return for monetary compensation.  Eg. Schools, sports facilities, hospitals, office buildings, malls and large businesses have on-site cafeterias, restaurants. 
  • 21. Management Contract Advantages Disadvantages • Focus firm’s resources on its area of contracts • Minimal financial exposure • Potential returns limited by contract expertise • May unintentionally transfer proprietary knowledge and techniques to contractee
  • 22. Turnkey Project  A turnkey project is a contract under which a firm agrees to fully design, construct and equip a manufacturing/business/service facility and turn the project over to the purchaser when its ready for operation, for a remuneration.
  • 24. FDI without alliances Companies enter the international market through FDI , invest their money, establish manufacturing and marketing facilities through ownership and control. Greenfield strategy- the term Greenfield refers to starting of the operations of a company from scratch in a foreign market.
  • 25. Greenfield Strategy Advantages Disadvantages • • • • Best site Modern facilities Economic development incentives Clean slate • Huge time and patience needed • Expensive • Comply with local and national regulation • Local workforce needed • Strongly perceived as a foreign worker
  • 26. FDI with strategic alliances Strategic alliance is a cooperative and collaborative approach to achieve the larger goals. Role of alliances  Many complicated issues are solved through alliances  They provide the parties each other’s strengths  Helps in developing new products with the interaction of 2 or more industries  Meet the challenges of technological revolution.  Managing heavy outlay  Become strong to compete with a multinational
  • 27. FDI with strategic alliances Modes of FDI through alliances are:  Mergers and acquisitions  Joint ventures
  • 28. Mergers and Acquisitions Merger : The combining of two or more companies, generally by offering the stockholders of one company securities in the acquiring company in exchange for the surrender of their stock. Acquisition : When one company takes over another and clearly established itself as the new owner, the purchase is called an acquisition. HDFC Bank acquisition of Centurion Bank of Punjab for $2.4 billion
  • 29. Acquisition Strategy Advantages • Obtains control over the acquired firm such as factories and brand names • Integrate the mgt of the firm into its overall international strategy Disadvantages • Assumes all the liabilities such as financial and managerial
  • 30. Joint Ventures   A joint venture is an entity formed between two or more parties to undertake economic activity together. The parties agree to create a new entity by both contributing equity, and then they share in the revenues, expenses, and control of the enterprise. Sony-Ericsson is a joint venture by the Japanese consumer electronics company Sony Corporation and the Swedish telecommunications company Ericsson to make mobile phones
  • 31. Joint Ventures  Advantages:  Benefit from local partner’s knowledge.  Shared costs/risks with partner.  Reduced political risk.  Disadvantages:  Risk giving control of technology to partner.  May not realize experience curve or location economies.  Shared ownership can lead to conflict