What does International Business Mean?
The term "international business" refers to a wide range of activities undertaken by many organisations to gain access to foreign markets; however, it is not widely used because the average person cannot identify the activities as being part of international business. There are several approaches that businesses looking to do business internationally can take, which are referred to as modes of international business.
Modes of Entering International Business
Why Should Companies Expand Globally?
A truly international corporation has a globally distributed supply chain. Even if a global supply chain has flaws that are frequently beyond a company's control, there are various reasons why a company might want to explore foreign markets.
Reasons Why Companies Should Expand Globally
Companies Usually Decide To Enter International Markets For The Following Reasons:
1. Determine Which Markets Will Be More Profitable
This is why many domestic companies are expanding into international markets. A global market's purchasing power may increase, resulting in higher earnings for the same products. This excludes the initial go-to-market costs associated with entering that foreign market.
2. Revenue Growth
One of the primary benefits of globalisation is an increase in revenue. International marketing allows you to reach a larger audience than your local market, which increases sales more effectively. Global expansion is required for business growth that is not limited to the typical revenue your local market can provide for your organisation.
3. Savings Increase
While going global increases profit potential, it also allows for lower expenses. Doing business abroad is typically less expensive because you can cut production costs in countries with lower wages. Because of the disparity in minimum wages around the world, you may have to pay your overseas employees less in salary than your local employees. Apple, for example, outsources manufacturing to China to save money on labour.
Different Modes of Entering International Business
Types of Entry Modes in International Business
Below are the different modes of international business -
1. Exporting
The traditional mode of entering into international business is Exporting. Exporting is the simplest way to get started in foreign business. As a result, most businesses begin their global expansion in this manner. The act of selling goods and services produced domestically in other countries is known as exporting. Exports are classified into two types:
Direct exports are transactions in which a company sells its products directly to a buyer in another country. At this company, you will gain firsthand market knowledge.
Indirect exports include hiring a third party's skills to facilitate the transaction. The fee is the amount charged by the intermediary for its services.
2. Licensing
In this mode of entry, a manufacturer from the home country rents the right to their intellectual properties, such as technology, copyrights, brand names, and so on, to a manufacturer from a foreign country. To obtain the license, you must pay a set fee. Lessees are manufacturers who lease, and licensees are manufacturers from the country that receives the license. Essentially, the licensee is purchasing another company's assets (know-how or R&D). The licensor may grant these rights non-exclusively to a single licensee or exclusively to one or more licensees.
3. Franchising
A separate company known as the franchisee operates under the brand of a different organisation known as the franchisor in this model.
Because of franchising, a franchisee can use a name, procedure, method, or trademark. Furthermore, the franchisor company provides raw materials, assists the franchisee with business operations, or does both.
4. Management Contracts
A company essentially rents out its knowledge or know-how to a government or business in the form of individuals who enter the foreign setting and manage the business under management contracts and do contract manufacturing.
This strategy of entering international markets is frequently used with a new facility after a company has been seized by the national government or when a business is experiencing difficulties.
5. Foreign Direct Investment
A corporation can enter a foreign market through foreign direct investment by investing significantly there. Foreign direct investment can be used to enter the global market through mergers and acquisitions, joint ventures, and greenfield investments. This strategy is appropriate when there is sufficient demand, market size, or market growth potential to justify the investment.
6. Joint Endeavors
A joint venture is one of the preferred ways to enter the global market for companies that don't mind sharing their brand, knowledge, and expertise.
Companies that want to expand into international markets can form joint ventures with local companies in those markets, in which both joint venture partners share the benefits and risks of the business.
The investment, costs, profits, and losses are allocated to the two corporate units in accordance with a predetermined ratio.
This method of entering the global market is suitable for countries where the government prohibits 100 percent foreign ownership in certain industries.
Case Study - Different Modes of Entering International Business
In 1994, the corporation began offering free coffee to visitors in several Beijing hotels to promote the Starbucks brand. This campaign demonstrated that their goods had a sizable market in China, particularly among foreigners. People in the area who attempted to emulate Western culture expressed a desire to drink coffee. Western brands and goods enticed the younger generation as well. These factors prompted Starbucks executives to investigate and comprehend the Asian country's economic environment.
Even though Starbucks encountered numerous challenges when attempting to enter the Chinese market, by 2012, they had successfully expanded their business into over 20 large or medium-sized Chinese cities, with over 560 stores opened. The incredible achievement is due to meticulous marketing analysis and various marketing methods used at various times. These strategies typically refer to joint ventures and license agreements as two distinct methods of entering international markets.
Conclusion
So, above are the methods of entry into foreign markets. Before entering the global market, the company must make a critical decision regarding its operational business plan. The best international business model should be selected based on the company's expansion and diversification requirements. The company's ability and willingness to devote resources, the desired level of control, the level of risk the company is willing to accept, the level of competition, the calibre of the infrastructure, and other factors must all be considered.
FAQs on Modes of Entering International Business
1. What are the primary modes of entering international business for a company as per the CBSE syllabus?
A company can enter international business through several modes, each with different levels of risk, control, and investment. The main modes are:
- Exporting and Importing: Selling goods to or buying goods from other countries, either directly or through intermediaries.
- Contract Manufacturing: Outsourcing the production of goods to a local manufacturer in the foreign country while retaining marketing responsibilities.
- Licensing and Franchising: Granting a foreign company the right to use intellectual property (licensing) or an entire business model (franchising) for a fee or royalty.
- Joint Ventures: Forming a partnership with a local company in the foreign country to establish a new business entity, sharing ownership and control.
- Wholly-Owned Subsidiaries: Establishing a firm in a foreign country that is fully owned and controlled by the parent company, either by setting up a new facility (greenfield venture) or acquiring an existing firm.
2. What is the core difference between direct and indirect exporting?
The core difference between direct and indirect exporting lies in the use of intermediaries. In direct exporting, a company sells its products directly to customers or businesses in a foreign country without any middleman. In contrast, indirect exporting involves selling through an intermediary, such as an export house or trading company, located in the company's own country.
3. Explain the concept of a joint venture with a real-world example.
A joint venture is a business arrangement where two or more independent companies agree to pool their resources to create a new, separate business entity. The partners share the ownership, risks, and profits of this new venture. This mode is often used to gain access to a local partner's knowledge of the market and distribution network. For example, the collaboration between Maruti Suzuki India Limited was initially a joint venture between India's Maruti Udyog Limited and Japan's Suzuki.
4. How do licensing and franchising differ as modes of entering international business?
While both licensing and franchising involve granting rights to a foreign entity, they differ in scope and control.
- Scope: Licensing is typically limited to granting rights over intellectual property like patents, trademarks, or technology for production. Franchising involves granting rights to an entire business model, including the brand name, operational systems, and marketing strategies.
- Control: The franchisor usually exercises significant control over the franchisee's operations to ensure brand consistency. In a licensing agreement, the licensor has less control over the licensee's business operations.
5. Which entry mode gives a company maximum control over its foreign operations, and what is the trade-off?
A wholly-owned subsidiary offers a company the maximum possible control over its international operations. This is because the parent company has 100% ownership and does not need to share strategic decisions, technology, or profits with a local partner. The major trade-off for this high level of control is the high level of risk and investment. The parent company bears the full cost and all the risks of setting up and running the business in the foreign market.
6. Why might a business choose contract manufacturing over setting up its own factory abroad?
A business might choose contract manufacturing for several strategic reasons. Firstly, it provides a way to enter a foreign market with very little financial investment, as there's no need to build or buy a factory. Secondly, it allows the company to take advantage of lower production and labour costs in the foreign country. Lastly, it is a low-risk strategy to test a new market, as the company is not tied to long-term physical assets and can focus its resources on marketing and sales.
7. What key factors must a company analyse before choosing a mode of entry for a foreign market?
Choosing the right entry mode is a critical strategic decision. A company must analyse several factors, including:
- Level of Control Desired: How much control does the company want over its marketing, operations, and quality? Wholly-owned subsidiaries offer the most control, while licensing offers the least.
- Risk and Investment: How much capital is the company willing to invest, and what level of risk is it prepared to accept? Exporting is low-risk, while foreign direct investment (FDI) is high-risk.
- Government Regulations: The host country's policies on foreign ownership can limit choices. Some countries may prohibit 100% foreign ownership in certain sectors, making joint ventures a necessity.
- Market Knowledge: If a company lacks knowledge of the local market, a joint venture with a local partner can be highly beneficial.
