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Subject COMMERCE

Paper No and Title 11; International Business

Module No and Title 2; mode of International Business- I

Module Tag COM_P11_M2

COMMERCE PAPER NO.11 : INTERNATIONAL BUSINESS

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TABLE OF CONTENTS

1. Learning outcomes
2. Meaning of strategic alliance
3. Types of Strategic Alliances

a. CONTRACTUAL STRATEGIC ALLIANCES

i. Licensing
ii. Franchising
iii. Joint R&D
iv. Turnkey Project
b. OTHER STRATEGIC ALLIANCES
i. Merger and Acquisition
ii. Joint venture
iii. Contract manufacturing
iv. Greenfield Strategy
v. Management Contract
4. Which mode is to be used in which situation
5. Difference between licensing and franchising
6. General factor effecting choice of entry strategy

Learning Outcomes

After studying this module, you shall be able to:

 Understand the meaning and types of strategic alliances

 Explain how and when they are used as an entry option.
 Evaluate contractual modes of entry into international business.
 Distinguish between licensing and franchising
 Understand the general considerations while selecting an entry strategy for
international business.

1. Meaning of Strategic Alliance

Strategic Alliance is important collaborative and partnership agreement by two or more

companies to attain a set of fixed goals. These collaborations can be of many types, including
contractual and equity forms. These are synergistic deal where the participating organizations
of different capabilities and strengths come together to the alliance. So we can say that an
alliance is an inter-firm collaboration over an agreed economic time and space for the
achievement of the participating companies’ objectives. Partners offer the strategic alliance
with resources such as manufacturing capability, products, distribution channels, capital
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equipment, project funding, knowledge, or intellectual

property. The alliance is a collaboration or
cooperation which brings synergy where every partner believes that the profit from the
alliance will be more than those from individual work. The alliance usually involves
technology transfers and economic specialization and sharing of expenses and risk.

3. Types of Strategic Alliances

The major types of strategic alliances are as follows:

CONTRACTUAL STRATEGIC ALLIANCES

•Licensing
•Franchising
•Joint R&D
•Turnkey Project

OTHER STRATEGIC ALLIANCES

•Merger and Acquisition
•Joint venture
•Contract manufacturing
•Greenfield Strategy
•Management Contract

CONTRACTUAL STRATEGIC ALLIANCES

3.1.1 LICENSING

It includes the sale of a right to use certain proprietary knowledge in a defined technology or
geographical area; it’s used mostly as a low cost way to enter foreign markets. The loss of
control over the technology is the major problem of licensing because when it goes in other
hands the risk of misuse arises.
Advantages
1. It has low financial cost and risks
2. Licensor can learn about foreign market potential
3. It helps the licensor to get access to foreign markets

Disadvantages

1. Foreign market access is controlled by contractee.

2. Licensee may not perform up to the expectations.
3. It may result in creating a future competitor.

3.1.2 FRANCHISING

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It is a method of business in which franchisor licenses that

method of doing business in which he have experience, to a
franchisee. Franchisees bear set-up fee and ongoing payments so the procedure is financially risk-
free for the business firm. But the problem in this is the loss of control over how franchisees run
their franchise.

Advantages

1. Low risk and low investment

2. Franchisors have the information regarding the market environment of the host country.
3. Franchisor can learns from the local market experience of the franchisees.
4. Franchisee gets the advantage of R& D.
5. Franchisee escapes from the threat of product failure.

Disadvantages

1. It is more complicating than home country franchising

2. It is tough to control the international franchisee.
3. It can reduce the market opportunities for both of them
4. Both are responsible to maintain product quality and its promotion
5. There is a difficulty of leakage of trade secrets.

3.1.3 JOINT R&D

These strategic alliances are based around R&D where two or more businesses choose to combine
their technological knowledge to produce new innovative products

3.1.3 TURNKEY PROJECT

This project refers to a project in which clients pay contractors to design and create new
facilities and train workforce. A turnkey project is mode for a foreign company to export its
technology and process to other countries by building a plant in that country. Industrial
companies use turnkey projects as an entry strategy when they specialize in complex
production technologies.

Advantages

 Turnkey projects help in earning huge returns from the exporting process technology or
know how.
 If FDI is limited by any government rule then this strategy is used to enter the market.
 If the political and economic environment of the country is not stable then this strategy is
less risky than the FDI.

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Disadvantages

 This strategy may create competitor.

 If the firms’ competitive advantage is the process technology then selling technology
can prove to be selling competitive advantage to the potential competitors.

3.2 OTHER STRATEGIC ALLIANCES

3.2.1 MERGERS & ACQUISTIONS

A domestic company chooses a foreign company and merges itself with foreign company so that
it can enter international market. The domestic company, to acquire ownership and control, may
purchase the foreign company. It helps in getting immediate access to international
manufacturing services and marketing system.

Advantages

1. The company gets the ownership and control over the acquired firm’s technology ,
employee, brand name
2. The company can make international strategy and generate additional revenues.
3. This strategy helps the host country in case the industry has already reached the stage of
optimum capacity level in the host country.

Disadvantages

1. Acquiring a firm in a foreign country is a difficult task involving lawyers, regulation,

bankers, merger and acquisitions' specialists from the two countries.
2. This adds no capacity to the industry.
3. If host countries imposed restrictions on acquisition of local companies by the foreign
companies then this strategy cannot be used.
4. Acquiring company may have to bear labor problem of the acquired company’s country.

3.2.2 JOINT VENTURE

Joint venture is an agreement by two or more companies to form a single entity to share some of
their capabilities and resources to build up a competitive advantage. Every one of the partner
company has an equity stake in the individual business and share profits. Small firms mostly not
prefer to go for joint ventures because of the required costs involved and commitment.
Advantages

1. Joint venture helps in providing large capital funds.

2. It divides the risk between partners
3. It provides skills like technical skills, human skills, marketing skills.
4. It makes large projects possible.
5. It has advantages of synergy due to joint efforts of parties.

Disadvantages

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1. Conflict may arise between the partners.

2. Once the dispute arises then the operations become inefficient.
3. Scope for end of a joint venture is more because of the reason that the entry of competitor
bring about changes in the partner’s power.
4. The decision making is slow in joint ventures because of the involvement of more than
one party.

3.2.3 CONTRACT MANUFACTURING

Contract manufacturing helps the firm to develop and control R&D, sales and servicing of its
products on international markets, and handing over responsibility for production to local firm. In
this the firm to have foreign sourcing without making the final commitment.

Advantages
1. Contract manufacturing helps in transfer of production know-how
2. There is no local investment and thus no risk.
3. Company will get control over R&D, manufacturer and marketing sales service
4. It helps in avoiding transfer-pricing problems.
5. With this company can avoid financial problem and have advantage of locally made
image.

Disadvantages
1. Production know-how transfer is very difficult.
2. It’s hard to find a reliable manufacturer.
3. In this extensive Training of the local manufacturer is required.
4. In this the sub contractor may become competitor.
5. In this control over manufacturing quality is very difficult.

3.2.4 GREEN FIELD STRATEGY

In Greenfield we expand operations in foreign market from ground zero. It includes purchase of
local property and local human resource.
Advantages
1. There is no risk of losing technical knowledge to competitor
2. One can have tight control over the operations.
3. It helps in creating new jobs in local markets.

Disadvantages
1. Lengthy process because company have to start from the scratch.
2. It is very time consuming because research has to be done before hand.
3. It may results in extra cost and time because of unstable emerging markets.

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MANAGEMENT CONTRACT

In management Contract one firm provides technical advice, managerial assistance or specialized
services to another firm but for a fixed time period on the payment of the fee.

Advantages
1. In this minimal financial exposure is required.
2. In this the focus of firm’s resource is on contract area.

Disadvantages
1. May by chance transfer techniques and proprietary knowledge to contractee.
2. Possible returns limited by contract expertise.

4. Which mode is to be used in which situation?

Firm chooses export mode, when the firm has no foreign manufacturing expertise and
requires investment only in distribution.
Firm chooses Licensing, when the firm needs to facilitate the product improvements
necessary to enter foreign market.
Firm chooses joint venture, when the firm needs to connect with an experienced partner
already in the targeted market and reduce risk.
Firm chooses Greenfield strategy, when the firm’s intellectual property rights in an
emerging economy are not well protected, the number of the firm in the industry is growing
fast and the need for global integration is high.

5. Difference between Licensing and Franchising.

5.1 Licensing is a business arrangement between two companies in which one company
permits another company to produce its product for a specified payment. In franchise a
license is issued to someone to run a business using a common operating support system,
a common brand name on the payment of fees.
5.2 The franchisee and the franchisor are strongly related to each other and have better
working relationships in franchising. The franchisee gets the rights to use the franchisor’s
logo and trademark. The relationship of a licensee and the parent business is not as strong
as a franchisee franchisor relationship because a licensee does not have the rights to use
the trademark and logo of the parent business.
5.3 Licensees do not get to have territorial rights from the company giving license. So
licensing organization gets to sell similar licenses and products in the same geographical
area.
5.4 The franchisees are regularly provided various types of training and support but
Licensees do not receive support and training which a franchisee will receive.
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5.5 One advantage of licensing over franchising is their

cost is less in terms of the initial investment and ongoing charges.
5.6 In franchising franchisee require to pay royalty whenever a profit is made, a licensing
opportunity does not demand such an expense.
5.7 Also, once the licensee successfully set up its business, the relationship between
companies is limited to the regular purchase of products.

6. General Factors Effecting Choice of Entry Strategy.

There are no “right” decisions with foreign market entry; different decisions are associated with
different levels of risk and reward. Businesses in developing countries can learn from the
experiences of organizations in developed countries. The general considerations while selecting
an entry strategy for international business

6.1 Type of System: There are various difficulties in doing business in developing and
transition economies because of Gaps in the knowledge of the Western system regarding
business plans and its marketing, profits of businesses, non convertibility of the
currencies, widely variable rates of return Differences in the accounting system.
6.2 Balance of Payments: the valuation of a countries currency effected country’s balance of
payments and affects business transactions between countries.
6.3 Cultural Environment: The impact of culture on entrepreneurs and strategies is
important. A significant cultural concern is corruption and finding a translator.
6.4 Technological Environment: New products in a country are produced based on the
conditions and infrastructure of that country that’s why technology varies considerably in
different countries.
6.5 Political-Legal Environment: Different political and legal environments create different
business problems. Every element of the international business strategy can be affected
by different legal environments. Laws governing business arrangements are different in
different countries with 150 different legal systems and sets of national laws.
6.6 Economics: A domestic business strategy is plan under only economic system and has
the similar currency. Creating a business strategy for multiple countries means handling
different levels of economic development and different distribution systems which is very
tough.
6.7 Strategic Issues: Strategic issues are important to the international entrepreneur are

 The sharing of duty between the foreign and home operations.

 The type of the planning, reporting, and control systems to be used.
 The suitable organizational structure for doing international operations.
 Up to which level standardization possible.

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Managers must decide on the correct entry mode for a

particular product/ country, this is done by following one of
three rules:

• The Naive rule - whereby managers use the same entry mode for
exporting to all their aim countries, by far the riskiest option since
managers can end up using an inappropriate entry mode for a particular
foreign country or forsake promising foreign markets
• The Pragmatic rule - whereby managers start by assessing export entry
and change their entry strategy, this results in saving of time and effort
yet finally fails to bring managers to the appropriate mode
• The Strategy rule - whereby managers use right entry mode as a key to
the success of their foreign entry strategy, doing systematic comparisons
of every entry modes. It is the most complicated method but results in
better entry decisions.

Summary

 An alliance is an inter-firm collaboration over an agreed economic time and space for the
achievement of the participating companies’ objectives. Partners offered the strategic
alliance with resources such as manufacturing capability, products, distribution channels,
capital equipment, project funding, knowledge, or intellectual property.
 The major types of strategic alliances are contractual strategic alliances which include
licensing franchising joint R&D turnkey project and other strategic alliances which
include merger and acquisition joint venture contract manufacturing Greenfield strategy
management contract.
 Licensing it includes the sale of a right to use certain proprietary knowledge in a defined
technology or geographical area; it’s used mostly as a low cost way to enter foreign
markets.
 Franchising is a method of business in which franchisor licenses that method of doing
business in which he have experience, to a franchisee.
 Joint R&D are based around R&D where two or more businesses choose to combine their
technological knowledge to produce new innovative products
 Turnkey project mode for a foreign company to export its technology and process to
other countries by building a plant in that country.
 In mergers & acquisitions domestic company chooses a foreign company and merger itself
with foreign company so that it can enter international market.

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 Joint venture is an agreement by two or more

companies to form a single entity to share some of their capabilities and resources to
build up a competitive advantage.
 Contract manufacturing helps the firm to develop and control R&D, sales and servicing
of its products on international markets, and handing over responsibility for production to
local firm.
 In Greenfield we expand operations in foreign market from ground zero. It includes
purchase of local property and local human resource.
 In management contract one firm provides technical advice, managerial assistance or
specialized services to another firm but for a fixed time period on the payment of the fee.

 General factors effecting choice of entry strategy are type of system, Balance of
Payments, Cultural Environment, Technological Environment, Political-Legal
Environment, Economics Strategic Issues.

COMMERCE PAPER NO.11 : INTERNATIONAL BUSINESS

MODULE NO.2 : MODE OF INTERNATIONAL BUSINESS- I