LESSON 3: ENTRY MODES IN INTERNATIONAL BUSINESS

A mode of entry into an international market is the channel which your

organization employs to gain entry to a new international market.

Modes of entries:
a) Exporting and importing of goods
b) Exporting and importing of services
c) Licensing and Franchising
d) Turnkey operation
e) Joint Ventures
f) FDI & FII
g) Mergers & Acquisitions

1: Exporting

 Exporting
 There are direct and indirect approaches to exporting to other
nations. Exporting is a typically the easiest way to enter an
international market, and therefore most firms begin their
international expansion using this model of entry. Exporting is the
sale of products and services in foreign countries that are sourced
from the home country. The advantage of this mode of entry is
that firms avoid the expense of establishing operations in the new
country. Firms must, however, have a way to distribute and
market their products in the new country, which they typically do
through contractual agreements with a local company or
distributor. When exporting, the firm must give thought to
labeling, packaging, and pricing the offering appropriately for the
market

 Among the disadvantages of exporting are the costs of

transporting goods to the country, which can be high and can
 have a negative impact on the environment. In addition, some
countries impose tariffs on incoming goods, which will impact the
firm's profits. In addition, firms that market and distribute
products through a contractual agreement have less control over
those operations and, naturally, must pay their distribution
partner a fee for those services.

2a : Licensing

 Licensing includes franchising, Turnkey contracts and contract

manufacturing.

 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.

Licensing :

Advantages

a. Low investment on the part of licensor.

b. Low financial risk to the licensor

 c. Licensor can investigate the foreign market without much
efforts on his part
d. Licensee gets the benefits with less investment on research
and development

e. Licensee escapes himself from the risk of product failure.

Disadvantages

a. It reduces market opportunities for both

b. Both parties have to maintain the product quality and

promote the product. Therefore one party can affect the
other through their improper acts.

c. Chance for misunderstanding between the parties

d. Chance for leakages of the trade secrets of the licensor.

e. Licensee may develop his reputation international trade and

policy complete note

2.b: FRANCHISING

 It is a specialized form of licensing.

 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.
So the franchisor provides the following services to the
franchisee.

1. Trade marks

2. Operating System

3. Product reputations

4. Continuous support system like advertising, employee

training, reservation services quality assurances program etc

FRANCHISING

Advantages:

a. Low investment and low risk

b. Franchisor can get the information regarding the market

culture, customs and environment of the host country.

c. Franchisor learns more from the experience of the

franchisees.

d. Franchisee get the benefits of R& D with low cost.

e. Franchisee escapes from the risk of product failure.

Disadvantages:

a. It may be more complicating than domestic franchising.

 b. It is difficult to control the international franchisee.
c. It reduce the market opportunities for both

d. Both the parties have the responsibilities to maintain

product quality and product promotion.
e. There is a problem of leakage of trade secrets

Sectors utilising franchising

• Automotive

• Hotels & Motels

• Business Services

• Maintenance

• Personal Care

• Children's Businesses

• Pets

• Recreation

• Financial Services

• Food/Full-Service Restaurants

• Food/Quick-Service Restaurants
 • Food/Retail Sales

• Home Improvements

• Retail

• Services

• Technology

FRANCHISING

Advantages:

a. Low investment and low risk

b. Franchisor can get the information regarding the market

culture, customs and environment of the host country.

c. Franchisor learns more from the experience of the

franchisees.

d. Franchisee get the benefits of R& D with low cost.

e. Franchisee escapes from the risk of product failure.

Disadvantages :

a. It may be more complicating than domestic franchising.

b. It is difficult to control the international franchisee.

 c. It reduce the market opportunities for both

d. Both the parties have the responsibilities to maintain

product quality and product promotion.

e. There is a problem of leakage of trade secrets

3: Turnkey Project

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.

4: Joint Ventures

 Joint Ventures

 Parties to an international joint venture share the costs and

burdens of operations while profiting equally from a market share
in both countries. Your partnership will allow you to sell your
goods and services in your partner's home country and vice versa.
The results include doubled financial power, twice the marketing
ability, twice the sales in some cases and entry into a market that
might not otherwise be open to you.
On average each fast growing companies is engaged in 5 different types
of joint venture

Connection to Technological Assets

 You could possibly want entry to technological assets you

couldn't afford personally, or vice versa. Sharing progressive and
proprietary engineering can increase items, as well as your
individual understanding of technological processes.

 Joint ventures are extremely frequent - Particularly, JVs are very

prevalent amongst massive organization.

5a: Foreign Direct Investment

 FDI (Foreign Direct Investment) is when a foreign company invests

in India directly by setting up a wholly owned subsidiary or getting
into a joint venture, and conducting their business in India.

 IBM India is a wholly owned subsidiary of IBM, and is a good

example of FDI where a foreign company has set up a subsidiary
in India and is conducting its business through that company.
What's amazing about IBM is that, it is now the largest Indian IT
company in India. It is serving Indian customers, and a large
domestic market that was not tapped by the Indian players
themselves.

5b: foreign institutional investors (FII)

  FII) is when foreign investors invest in the shares of a company
that is listed in India, or in bonds offered by an Indian company.
So, if a foreign investor buys shares in Infosys then that qualifies
as FII Investment.

 It is easy to see why you would prefer FDI to FII investments. FDI
investments are more stable because companies like IBM set up
offices, hire employees, and have a long term plan for the
country. IBM can't just pull out a few million dollars from India
overnight, which is what FII investors do from time to time and
that leads to market crashes.

A foreign institutional investment (FII) is an investor or investment fund

registered in a country outside of the one in which it is investing.
Institutional investors most notably include hedge funds, insurance
companies, pension funds and mutual funds.

DIFFERENCE BETWEEN FDI & FII

FDI
1 FDI is when foreign
company brings
capital into a country
or an economy to set
up a production or
some other facility.
FDI gives the foreign
company some
control in the
operations of the
company
FII
Fll is when a foreign
company buys equity
in a company through
the stock markets.
Therefore, in this
case, Fil would not
give the foreign
company any control
in the company
2 FDI involves in the FII is a short term
direct production investment mostly in
activity & also of the financial markets
medium to long term & it consist of Fil
nature
3 It enables a degree of It does not involve
control in the obtaining a degree of
company control in a company

4 FDI brings-long term FIl brings short-term

capital capital

6: Mergers & Acquisitions

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

Factors affecting Economic Development:

 Inflation distorts business decisions as buying capacity of
consumer reduces.

 Tax Levels Income tax and sales tax (eg VAT) affect how much
consumer have to spend, hence the demand.
 Interest Rates can impact the growth of an industry. For ex. High
car loan interest rate will discourage vehicle industry.
  Governmental Policies provides a friendly environment for
businesses to move into and operate within a community

#1: Walt Disney Co. and Pixar

Our first merger example comes from the world of entertainment. In

2007, the Walt Disney Company acquired Pixar Entertainment for a
price of $7.4 billion. This is a merger that makes sense at every level.

Disney has been the biggest name in family entertainment for decades,
creating classics such as Cinderella, Mary Poppins, and The Lion King.
Pixar was a newer entry on the market, but made a huge impact with
its beloved films Toy Story and Finding Nemo.

The synergy between the two companies was apparent even to casual
observers. The merger allowed Disney to consolidate its brand as the
biggest provider of family-friendly films and it allowed Pixar to greatly
increase its production process and release two new films per year. The
post-merger Pixar films, including Up and WALL-E, have been hugely
successful.

#2. eBay and PayPal

eBay was the world's biggest online auction site when it acquired digital
payment provider PayPal in 2002. Its goal was to facilitate online
payments on eBay, making this corporate marriage the perfect vertical
merger example.
The merger led to growth for the merged companies, with stocks rising
dramatically in the aftermath. We do think it's important to note that
eBay spun off PayPal as a separate company in 2004 on the demands of
investors, but there's no question that the merger helped eBay solidify
its reputation and its stock has continued to see modest growth while
PayPal's stock has increased rapidly.

 Currency Strength is important even for companies that do not

import or export goods.

 Government Intervention Many industries are regulated by the

government which ensures safety of consumers, employees &
natural resources

 Overall Economic Health The economic state of the country and

consumer confidence can also spur development or harm it.

 Social and Cultural Values affect economic development through

attitude toward progress.

 Foreign Direct Investment

LESSON 4: INTERNATIONAL TRADE POLICY

Protectionism & Barriers to Trade

 Trade disputes between countries happen because one or more

parties either believes that trade is being conducted unfairly, on
 an uneven playing field, or because they believe that there is one
or more economic or strategic justifications for import controls.

 Protectionism represents any attempt to impose restrictions on

trade in goods and services. The aim is to cushion domestic
businesses and industries from overseas competition and prevent
the outcome resulting from the inter-play of free market forces of
supply and demand.

Types of Trade Barriers

Trade barriers can be broadly divided into the following two categories:

1. TARIFF BARRIERS

 Tariff barriers refer to duties and taxes imposed by the govt on

the goods imported from abroad.
 Tariff barriers restrict imports indirectly.

2. NON TARIFF BARRIERS

 Non tariff barriers are various quantitative and exchange control

restrictions imposed in order to restrict imports.
 Non tariff barriers restrict imports directly.

Type of tariff barriers

1. Import Duties.

2. Export Duties.

3. Transit Duties.
 4. Countervailing Duties.

5. Anti-Dumping Duties.

TYPE OF NON TARIFF BARRIERS

1. Import Quotas
2. Voluntary export restraints(VERS)
3. Export subsidy
4. Countervailing duty
5. Govt procurement
6. Customs valuation and classification
7. Import licensing procedures
8. Local content regulations
9. Technical barriers

1:Quota

 A quota is a physical quantity limit or maximum amount of a good

that can be legally imported over a specific period of time. An
import quota implies a fixed quantity or value of a commodity
that has been allowed to be imported in the country during a
given period of time.

 In practice, quotas may be fixed either in terms of the physical

volume or monetary value of imports or a combination of the
two.

TYPES OF IMPORT QUOTAS

 1.Tariff quota: under this system, a given quantity of a good is
permitted to enter duty free or upon payment of relatively low
duty. But imports in excess of that quantity are charged a
relatively high rate of duty.

2.UNILATERAL QUOTA: It is imposed without prior negotiation

with foreign governments.

3.BILATERAL QUOTA: In this system, quotas are set through

negotiation between the importing country and the exporting
country.

4.MIXING QUOTA: It is a type of regulation which requires

producers to utilize a certain proportion of domestic raw
materials along with imported parts to produce finished goods
domestically.

5.IMPORT LICENSING: Under this, prospective importers are

required to obtain a license from the proper authorities for
importing any quantity within the specified quotas.

VOLUNTARY EXPORT RESTRAINTS(VERS)

 A VER is an agreement by an exporter country's exporters or govt

with an importing country to limit their exports to it. It is entered
into by the importing country when its domestic industry is
suffering from large imports.

 VERS have been adopted by countries because the use of quotas

and tariffs has been forbidden by the GATT(General Agreement
onTariffs and Trade). But the VERS do not come under the GATT
rules.
3: Export subsidy

 An export subsidy is a govt grant to an export firm to reduce the

price per unit of goods exported abroad. It enables the firm to sell
a larger quantity of its goods at a lower price in the export market
than in the home market.

4: GOVT PROCUREMENT

 Govts discriminates between domestic and foreign suppliers. The

discrimination may be in various ways. In certain countries, there
is legislation to buy domestic goods and services even if they are
available from abroad at low rates.

Embargo:

 Embargo is a total prohibition of trade and commerce with a

country. The idea is to economically, financially, socially and
politically isolate a country. It has been used by powerful
countries to punish a not so strong political opponent.

 If the USA completely stops its trade with Iran, that would be an
embargo.

Sanctions:
 A lighter form of an embargo is a sanction, which is a partial
restriction on trade and commerce

LESSON 5: ECONOMIC INTEGRATION

Introduction

 Basically there are two approaches to international trade

liberalization and economic integration: the international
approach and the regional approach.

 The international approach involves international conferences

under WTO. The purpose of these international conferences is to
reduce barriers to international trade and investment.

 The regional approach involves agreements among a small

number of nations whose purpose is to establish free trade
among themselves while maintaining barriers to trade with the
rest of the world

Economic Integration

 A process whereby countries cooperate with one another to

reduce or eliminate barriers to the international flow of products,
people or capital.

 Regional Economic Integration: Agreement between countries in

a geographic region to reduce and ultimately remove tariff and
non tariff barrier to the free flow of good, services and factors of
production among each other.

 By entering into regional agreements groups of countries aim to

reduce trade barriers more rapidly than can be achieved under
the auspices of the WTO
Levels Of Regional Economic Integration:

1.Free Trade Area

2. Customs Union

3.Common Market

4. Economic Union

5. Political Union

Preferential Trade Area:

 Preferential trade agreements provide lower barriers on trade

among participating nations than on trade with nonmember
nations. That is, lower tariffs on imports of each other.

 This is the loosest form of economic integration.

 A good example is the Commonwealth Preference System, which

was established in 1932 among 48 Common wealth countries of
the British empire.

Free Trade Area(FTA)

 An agreement between two or more countries to remove all trade

barriers between themselves.
  A free trade area occurs when a group of countries agree to
eliminate tariffs between themselves, but maintain their own
external tariff on imports from the rest of the world.

 Examples of FTA are: The ASEAN Free Trade Agreement(AFTA)

and the North American Free Trade Areas(NAFTA).

Customs Union

 An agreement between two or more countries to remove tariffs

between themselves and set a common external tariff on imports
from non-member countries.

 Each country determines its own barriers and maintains its own
external tariffs on imports against non-members.

 A customs union has common policies on product regulations and

movement of factors of productions in goods, services, capital and
labor amongst members

 Unlike FTA, members of a customs union have common. policies

on external tariffs against non-members,

 An example of a customs union is the established customs union

between the European Union and Turkey, which came into effect
in 1996.

Common Market

• An agreement between two or more countries to remove all

barriers to trade and allow free mobility of capital and labor
across member countries.
 • Harmonize trade policies by having common external tariffs
against non-members.

• Example is the European Union (EU) previously known as

European Economic Community(EEC)

Economic Union

 An agreement between two or more countries to remove barriers

to trade, allow free flow of labor and capital and coordinate
economic policies.

 Sets trade policies through common external tariffs on non-

members.

 Integration is more intense in an economic union compared to a

common market, as member countries are required to harmonize
their tax, monetary, and fiscal policies and to create a common
currency

 Example is the European Union (EU) where economic and

monetary integration has created a single market with a common
euro currency

Political Union:

 An agreement between two or more countries to coordinate their

economic monetary and political systems.
  Required to accept a common stance on economic and political
policies against non-members.

 Example is US where each US state has its own government that

sets policies and laws. But each state grant control to the federal
government over foreign policies, agricultural policies, welfare
policies and monetary policies. Goods, services, labor and capital
can all move freely without any restrictions among the US states
and the government sets a common external trade policy

The European Union in brief

 The European Union (EU) is an economic and political union.

 It is a unique economic and political partnership between 28

European countries.

 It has delivered half a century of peace, stability, and prosperity,

helped raise living standards, launched a single European
currency, and is progressively building a single Europe-wide
market in which people, goods, services, and capital move among
Member States as freely as within one country

Why the European Union

The EU's mission in the 21st century is to:

 maintain and build on the peace established between its member

states;

 bring European countries together in practical cooperation;

 ensure that European citizens can live in security;

 promote economic and social solidarity;

 preserve European identity and diversity in a globalized world;

 promulgate the values that Europeans share.