INTERNATIONAL BUSINESS

SEM-IV
B.COM (HONS)
Unit 1: Introduction to International Business
Globalization - concept, significance and impact on international business; international
business contrasted with domestic business; complexities of international business;
internationalization stages and orientations; modes of entry into international businesses.

G lobalization is the word used to describe the growing interdependence of the world’s
economies, cultures, and populations, brought about by cross-border trade in goods and
services, technology, and flows of investment, people, and information. Countries have built
economic partnerships to facilitate these movements over many centuries. But the term gained
popularity after the Cold War in the early 1990s, as these cooperative arrangements shaped
modern everyday life.
The wide-ranging effects of globalization are complex and politically charged. As with major
technological advances, globalization benefits society as a whole, while harming certain
groups. Understanding the relative costs and benefits can pave the way for alleviating problems
while sustaining the wider payoffs.
THE HISTORY OF GLOBALIZATION IS DRIVEN BY TECHNOLOGY,
TRANSPORTATION, AND INTERNATIONAL COOPERATION
Since ancient times, humans have sought distant places to settle, produce, and exchange goods
enabled by improvements in technology and transportation. But not until the 19th century did
global integration take off. Following centuries of European colonization and trade activity,
that first “wave” of globalization was propelled by steamships, railroads, the telegraph, and
other breakthroughs, and also by increasing economic cooperation among countries. The
globalization trend eventually waned and crashed in the catastrophe of World War I, followed
by postwar protectionism, the Great Depression, and World War II. After World War II in the
mid-1940s, the United States led efforts to revive international trade and investment under
negotiated ground rules, starting a second wave of globalization, which remains ongoing,
though buffeted by periodic downturns and mounting political scrutiny.
MAJOR EVENTS THAT CHANGED THE WORLD TRADE
1. Technological Breakthroughs and Industrialization (1800 — 1899): steamships,
railroads, and the telegraph accelerate global commerce, along with industrialization and
mass production. Rapid population growth increases demand for goods and services.
England becomes first country to formally adopt gold standard—meaning currencies are
convertible to a specific amount of gold—creating stability in exchange rates and
facilitating trade and investment. Most developed nations follow suit. Western nations

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 capitalize on natural resources provided by colonies and foreign markets, use force and
economic pressure to open China and Japan.
2. Rise of Automobiles and Airplanes (1900-1950): new modes of transportation further
link economies. The first transatlantic flight, from Berlin to New York, lands in 1938.
3. World War was Ignited by Nationalist Conflict (1914-1918): the war wreaks havoc on
global economies and trade. Defeated Germany is forced to make massive reparation
payments to Britain and France.
4. Gold Standard and Economic Boom (1920-1929): the United States and other countries
adopt the gold standard along with protectionist policies. The us economy booms, spurred
by a stock market bubble and mass production. Germany struggles to pay reparations and
prints money to pay war debts, igniting hyperinflation. Countries retaliate against German
manufacturing for delayed reparation payments.
5. Great Depression and Protectionism (1929-1939): the 1929 us stock market crash ushers
in the great depression. Many countries leave the gold standard and devalue their
currencies to try to gain trade advantage. The United States adopts Smoot-Hawley tariff
act in 1930; other countries retaliate with their own tariffs on us goods, deepening global
economic downturn. Deteriorating German economy fuels rise of nazi party. Regional
trade blocs form, excluding Germany, Italy, and Japan. Axis powers launch imperialist
conquests in Manchuria, Ethiopia, Austria, and Czechoslovakia. Britain and France declare
war against Germany.
6. World War ii Mobilizes Allies Against Axis Powers (1939-1945): the United States,
Britain, the Soviet Union, China, and others wage war against Fascism and Nazism.
7. Bretton Woods Conference Seeks Order (1944): the United States and soon-to-be
victorious allies’ parley, setting new postwar rules and institutions to liberalize trade and
revive economic growth. The dollar and its peg to gold dominates the new global currency
framework. The Soviet Union does not ratify the agreement. The cold war (1945–91)
deepens soviet isolation from the western trade order.
8. General Agreement on Tariffs and Trade (GATT) (1948): the first worldwide
multilateral trade agreement ushers in postwar era of more open trade.
9. Computers and Kennedy round (1950-1969): computers pave way for new commercial
breakthroughs. Kennedy round of the GATT talks accelerates trade liberalization.
10. End of Fixed Exchange Rates (1970-1979): energy prices spike, set by the organization
of the petroleum exporting countries (OPEC), triggering high inflation and unemployment
throughout global economy. Us inflation and trade imbalances compel Nixon
administration to end dollar convertibility to gold for foreign governments. Most
currencies eventually float in value.
11. Debt Crisis, Free Market Economics, and Plaza Accord (1980-1989): the International
Monetary Fund (IMF) and other institutions impose strict austerity and free market rules
on Latin American countries in return for aid, causing backlash. President Ronald Reagan
and UK Prime Minister Margaret Thatcher embrace free market economics. Wall street
and financial globalization rapidly rise. Rising us trade deficits, especially with Japan, lead
to plaza accord, a major concerted foreign exchange intervention.
12. End of the Cold War (1989-1991): the collapse of the Soviet Union produces greater
cooperation in international institutions, increasing trade and financial integration.
13. Internet Connects World (1990-1999): the internet begins its meteoric rise transforming
global commerce. Powerful multinational corporations dominate the global economy.

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14. European Union Links Continent (1993): the formation of the European union solidifies
the single market that began developing in the 1950s, leading to the creation of the euro
currency in 1999.
15. North American Free Trade Agreement (NAFTA) (1994): a major trade deal between
Canada, Mexico, and the United States goes into force after bitter us debate. It is the first
free trade agreement between the United States and a developing country.
16. World Trade Organization (WTO) (1995): the modern trading system governed by rules
is established, replacing the GATT.
17. East Asian Financial Crisis (1997): declines in Asian currencies spark crisis in the region,
forcing austerity measures that revive hostility toward the IMF.
18. China and the WTO (2001): China joins the WTO and becomes the world’s largest
developing economy.
19. Global Financial Crisis Ignites Backlash (2008): an international banking crash along
with a European debt crisis results in the worst global recession since the great depression.
The group of twenty (G20) nations serve as a steering committee for efforts to counter
crisis effects, but their role produces backlash against globalization and us leadership.
20. Brexit (2016-2021): the United Kingdom votes to leave the European union, complicating
cross-border movement and trade. A last-minute deal between the two sides signed in
December 2020 allows a continuation of tariff-free trade in goods, but UK-EU trade still
falls sharply when Britain exits the European union in January 2021, leaving many issues
unresolved.
21. Trump Presidency Upends US Trade with a\Allies (2017-2020): President Donald j.
Trump disrupts the world trading and supply chain system by withdrawing from the trans-
pacific partnership (TPP), forcing a more restrictive rewrite of NAFTA, hampering the
WTO’s ability to settle trade disputes, and threatening or imposing tariffs on allies like
Canada, South Korea, and the European union over dubious national security concerns.
22. US-China Trade War (2018-): Trump ignites a tit-for-tat trade war with China, leading
to tariffs covering over half of the goods traded between the two countries by September
2019. China pledges to expand purchases of certain us goods and services by an additional
$200 billion by the end of 2021 under the “phase one agreement” of January 2020, but
falls short of targets. The tariffs remain under president joseph r. Biden jr., as of late 2022.
23. Covid-19 Pandemic (2020-): the covid-19 virus spreads worldwide, costing an estimated
6.6 million lives by late 2022, disrupting global supply chains, and triggering a global
recession. By the end of 2020, several vaccines are developed, but global vaccination
efforts falter, with less than 25 percent of people in low-income countries receiving at least
one dose by October 2022. More transmissible variants spur additional outbreaks.
24. Russia’s war on Ukraine (2022-): Russian president Vladimir Putin’s invasion triggers a
humanitarian crisis in Ukraine and roils global food and energy markets, prompting more
than a thousand multinational companies to scale back or sever business ties with Russia.
Many countries impose coordinated sanctions on Russia to deter Putin’s war effort.

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 SIGNIFICANCE AND IMPACT ON INTERNATIONAL BUSINESS
Globalization has significantly transformed the landscape of international business and
commerce, revolutionizing the way nations engage in economic activities. With advancements
in technology, communication, and transportation, the world has become increasingly
interconnected, resulting in an unprecedented expansion of global trade. The impact of
globalization on international trade and commerce, highlight both the benefits and challenges
it presents.
i. Increased Market Access: Globalization has opened up new markets and created
opportunities for businesses to expand their reach beyond domestic boundaries. Reduced
trade barriers, such as tariffs and quotas, have facilitated the flow of goods and services
across borders, enabling businesses to tap into a global customer base. This expanded
market access has boosted trade volumes and spurred economic growth in many countries.
ii. Economic Growth and Development: Globalization has been a catalyst for economic
growth and development, particularly in emerging economies. By participating in
international trade, countries can capitalize on their comparative advantages and specialize
in producing goods and services that they are most efficient at. This specialization leads to
increased productivity, higher output, and enhanced competitiveness, driving economic
growth and raising living standards.
iii. Technological Advancements: Advancements in technology and communication have
been integral to the globalization of trade and commerce. The rise of the internet, e-
commerce platforms, and digital payment systems has revolutionized the way businesses
operate and interact with customers globally. Small and medium-sized enterprises (SMEs)
can now access international markets more easily, levelling the playing field and fostering
entrepreneurship and innovation.
iv. Job Creation and Labor Mobility: Globalization has created employment opportunities
by facilitating the movement of labour across borders. As companies expand their
operations internationally, they often establish new branches or outsource certain functions
to other countries, creating jobs in both home and host nations. Moreover, the ability of
skilled workers to migrate to countries where their expertise is in demand has resulted in
a more efficient allocation of human capital.
v. Interconnected Supply Chains: Globalization has led to the development of complex and
interconnected global supply chains. Companies now source inputs, components, and
services from various countries to optimize costs and production efficiencies. While this
has increased business competitiveness and allowed for cost savings, it has also exposed
supply chains to vulnerabilities, as disruptions in one part of the world can have ripple
effects across the globe, as demonstrated by the COVID-19 pandemic.
vi. Cultural Exchange and Diversity: Globalization has fostered cultural exchange and the
sharing of ideas, values, and practices. International trade has facilitated the exchange of
goods, services, and cultural products, leading to greater cultural diversity and
understanding among nations. This cultural exchange has not only enriched societies but
has also influenced consumer preferences, driving demand for a wide range of products
and services.

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 Challenges and Considerations: While globalization has brought numerous benefits, it is not
without its challenges. Some of the key considerations include:
i. Inequality and Displacement: Globalization has contributed to income inequality within
and between countries. Some industries and regions may experience job losses or wage
stagnation due to competition from low-cost producers in other countries. Addressing these
disparities and providing support for affected workers and communities is crucial.
ii. Environmental Impact: Increased international trade has led to higher energy
consumption, greenhouse gas emissions, and the depletion of natural resources. Balancing
economic growth with environmental sustainability is a pressing challenge that requires
innovative solutions and responsible business practices.
iii. Protectionism and Trade Wars: The rise of protectionist policies and trade tensions
between nations pose threats to the benefits of globalization. Trade wars and the imposition
of tariffs can disrupt supply chains, increase costs, and dampen economic growth.
Navigating these challenges and promoting multilateral cooperation is essential for
maintaining a thriving global trading system.
Globalization has profoundly impacted international trade and commerce, presenting both
opportunities and challenges. It has expanded market access, fostered economic growth, and
fuelled technological advancements. However, it has also raised concerns about inequality,
environmental sustainability, and protectionism. To harness the benefits of globalization and
mitigate its negative effects, governments, businesses, and international organizations must
work together to promote inclusive and sustainable trade practices that benefit all stakeholders
in the interconnected global economy.

INTERNATIONAL BUSINESS CONTRASTED WITH DOMESTIC BUSINESS

What is Domestic Business?
Domestic business constitutes the economic transactions performed within the country's
geographical boundary. This means that both the parties that are the party that receives the
service and the party that renders its services should belong to the same country. It is also
referred to as internal business or home trade. It is comparatively easy to perform research in
domestic business compared to companies outside the nation. The risk of performing business
in the nation is also less in domestic business. Another benefit of performing domestic business
is that uniform rules and regulations bind them; that is, the selling process, currency, taxation
laws, and customer base are more or less uniform in the country, which benefits the
organization.
What is International Business?
International business constitutes the economic transactions performed outside the country's
geographical boundaries. This means that both parties are enclosed within the geographic
boundary of different countries. Since the organizations involved in international business are
located in different countries, they are also known as multinational or transnational companies
or organizations. It is comparatively more difficult to perform business research on
international business firms if compared to domestic companies. The risk involved in
performing international business is also significantly more. Since economic transactions are

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performed between two entities that may have different currencies, taxation laws, and
regulations, it increases the complexity of conducting business. Moreover, there are more
customers with different needs and requirements.

Description Domestic Business International Business

Definition The domestic business comprises all International Business comprises all the
the monetary transactions in monetary transactions in exchange for
exchange for any services performed any services performed outside the
within the nation's geographical nation's geographical boundary. Entities
boundary. from different nations participate in
these activities.

Buyer and In domestic business, both the entities
Seller that are the entity that pays for the
product or service and the entity that
renders it must reside in the same
country.
Currency Since both entities are located in the
same transactions, any monetary
transaction is performed in the form
of domination of the particular
country.
In International Business, the entity that
pays for the product or service and the
entity that renders it must reside in
different countries.
International businesses deal with
transactions in different domination as
the entities are located in different
countries.

Customers Since geographical boundaries bound
the customer base, most customers'
needs and standards of living are
similar. Therefore, the nature of the
customer is largely homogeneous.
Since the customer base is located in
different parts of the world, customers'
needs and standards of living can be
quite different. Therefore, the nature of
the customer is largely heterogeneous.

Geographical Trade activities are limited to the
Boundaries geographical boundaries of a
particular country.
Business Business Research is comparatively
Research less complex than international
business. There are fewer factors to
consider during transactions, and it is
relatively easier to understand the
needs of both entities.
The geographical boundaries of the
nation are not a constraint on trade.
Business research is comparatively more
complex in international business than in
domestic business. There are more
factors to consider during transactions,
and it is relatively difficult to understand
the requirements of both entities.

Capital Less capital investment is required to It requires huge capital investment as the
Investment establish a domestic business. organization requires to establish
institutions and offices in different
countries for smooth transactions.

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 Factors of The production of goods and services
Production is more efficient in domestic business
as there is greater mobility of factors
in domestic business than in
international business.
It is difficult to mobilize the factors of
production in international business.
Thus, the transactions are less efficient in
international business.

Restriction There are fewer restrictions on More restrictions are imposed in

domestic business as there are fewer international than domestic business as
governing bodies. Both entities have there is more governing body. The
to abide by the laws of the same organizations have to ensure to abide by
country. both domestic and international laws.

Quality The quality standards in domestic The quality standards are higher in
Standards business are often lower than in international business than the domestic
international business. business.

COMPLEXITIES OF INTERNATIONAL BUSINESS

International business is the production and sale of goods and services between countries. There
are several ways a business can be international:
• It produces goods domestically and sells both domestically and internationally.
• It produces goods in a different country but sells domestically.
• It produces goods in a different country and sells both domestically and internationally.
Businesses typically produce goods overseas due to lower labour costs or taxes, and they sell
products and services in the global market because of the high potential for gaining a larger
audience, new customers, and increased revenue.
“Although international business is extremely exciting, it can also be risky,”. Because every
country has its own government, policies, laws, cultures, languages, currency, time zones, and
inflation rate, navigating the global business landscape can be difficult. Here are some of the
complexities that are faced by international business:
1. Managing globally distributed teams
Developing and successfully managing teams at the international level is a tough job. The
complexities of international businesses like varying labour laws, payroll laws, compliance,
tax laws, employee rights, and varying technology access increase global team management
challenges.
To maintain a strong work association with your team spread across the globe, you must ensure
regular check-ins, preferably through a video conferencing platform that enables real-time
interactions. Many researchers have shown that employees who regularly interact with their
managers are three times more likely to be engaged in their work than employees who do not
interact.

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In the aftermath of the COVID-19 pandemic, when many companies have shifted to remote
working, distance divides teams. Therefore, effective communication and collaboration are
essential to ensure employees feel valued and productive work engagement.
2. Language obstacles
In international business, it’s prevalent to meet people speaking different languages. The
language barrier is one of the most significant international business challenges. Therefore,
most multinational companies hire employees fluent in at least one foreign language.
It’s noteworthy that organizations often face difficulty explaining their goals to the customers
due to the information lost in translation. It’s also vital to consider the languages your team
members speak, and the customer support executives should be in line with your target
customers. Significant investment in interpreters and maintaining a pool of employees
comfortable in major global languages ensures that your business operates smoothly.
In some countries, labour laws dictate that employment contracts are written in the local
language. While employing talent in another country becomes a challenge for international
business. Employing a local to verify the correctness and compliance of these contracts is one
way to solve this problem.
One example of a product “lost in translation” comes from luxury car brand Mercedes-Benz.
When entering the Chinese market, the company chose a Mandarin Chinese name that
sounded similar to “Benz”: Bēnsǐ. The name translates to “rush to death” in Mandarin
Chinese, which wasn’t the impression Mercedes-Benz wanted to make with its new audience.
The company quickly adapted, changing its Chinese name to Bēnchí, which translates to
“run quickly, speed, or gallop.”
It’s also critical to consider the languages spoken by your company’s team members based in
international offices. Once again, investing in interpreters can help ensure your business
continues to operate smoothly.
3. Currency exchange and inflation rate issues
An international business receives payments from multiple nations. The value of a dollar for
your native country will not always be equal to the same amount in other currencies. Therefore,
it’s one of the major problems of international business as the currency’s value consistently
fluctuates for the same amount of goods & services.
It’s recommended that you familiarize yourself with the currency exchange rates and the
inflation rates of the nations where your international business operates. The inflation rates
influence the price of commodities and labour costs, which eventually steers the final product
pricing. Monitoring these two rates provides essential insights into the market value of your
product & services in different locations over time.
Familiarize yourself with currency exchange rates between your country and those where you
plan to do business. The exchange rate is the relative value between two nation’s currencies.
For instance, the current exchange rate from the Canadian dollar to the US dollar is 0.77,
meaning one Canadian dollar is equal to 77 cents in US currency.
4. Cultural variations

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The different counties worldwide, sometimes other regions within these countries, have a
unique culture. Understanding the different cultures your employees and clients follow
enhances the management and increases cross-cultural business relationships. Eventually, this
reduces the complexities of international business and makes your processes highly effective.
Whether managing your overseas office, selling your products/services to international
clients/retailers, or operating an overseas manufacturing set-up, it will significantly benefit
your international operations once you understand their cultures and employ emotional
intelligence.
One example of a cultural difference between the United States and Spain is the hours of a
typical workday. In the United States, working hours are 9 a.m. to 5 p.m., often extending
earlier or later. In Spain, however, working hours are typically 9 a.m. to 1:30 p.m. and 4:30
to 8 p.m. The break in the middle of the workday allows for a siesta, which is a rest taken
after lunch in many Mediterranean and European countries.
5. Nuances of foreign policies, geopolitics, and cross-country relations
The international business environment is greatly affected by political scenarios and the foreign
relations between the countries. When you expand your business in the international market,
it’s essential to know the financial systems, trade policies, and country-specific tax regulations.
Friction in cross-country relations is one of the significant complexities of international
business. This knowledge affects your business strategy and ensures that you abide by the rules
and regulations of the operating country.
The political decisions taken by the leaders influence the taxes, labour wages, commodity
prices, transportation & infrastructure costs, etc. Therefore, you should update yourself with
the strategic decisions, and the workplace policy should comply with all the regulations.
One hypothetical example presents in Global Business is that if the Chinese government
decided to subsidize Chinese dairy farms, it would impact dairy farmers in all surrounding
countries. This is because, with extra funding, Chinese dairy farms may produce a surplus
of dairy products, causing them to expand their markets to neighbouring countries.
6. Supply chain risks
Managing the supply chain that encompasses national borders lies among the significant
problems of international business. The particulars of imports, exports, offshore shipping, and
related logistics are steered by international laws and other foreign legislations. If your business
sources products & services overseas, managing the supply chains can pose a significant threat
to international business.
International expansion is a strategic decision that should be taken after developing a solid
supply chain strategy as it affects the future of your business. Supply chain strategies need to
be unique based on your business requirements, and you need to develop them specifically for
the locations you wish to expand. This includes studying the local trade regulations, external
influences, existing supply chain, and local material availability.

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7. Talent acquisition and onboarding
Hiring and retaining talented employees is an essential aspect of international expansion.
Talented and motivated staff with the required knowledge base and industry experience of the
specific region are assets to the organization. If your business lacks experienced employees
who can act as an anchor for that location, your international expansion can face challenges.
This challenge is amplified in the case of venture mergers or acquisitions.
For an international business, hiring employees across the globe involves multiple challenges
like an onboarding plan unique to remote work, increased overhead expenses, extensive HR
support, etc. When you hire employees from overseas, access to these employees is not the
same for all as in offline work, making it challenging to make the right decision.
8. Compliance issues
Tax compliance issues are one of the challenges of expanding globally. All international
businesses have to deal with multiple countries having different business regulations, tax rates,
and other commercial fees; these are hindrances that must be complied with to operate globally.
If the business fails to comply with regulations, it can hinder business expansion and pay hefty
compliance charges. This means that employers must do thorough research and legitimate
paperwork to comply with the dynamic international regulations.
9. New market competition
When multiple companies offer similar products and services, their business models create
aggressive competition. If you wish to explore a new market, you need to do a market search
regarding the companies already providing the products and services in that segment. The
challenges of expanding globally also call for differentiating factors in your products and
services so that they gain a competitive edge in the market.
It’s a profitable business idea to venture into unique products & services to create your own
market while developing reputable business relationships with local vendors, shipping
agencies, suppliers, and logistics to strengthen your supply chain.
10. Brand consistency
International businesses solve different problems for different customers worldwide; it’s
challenging to create brand consistency and leverage it in the global market. Brand consistency
refers to the functional language, logo, work culture, and many factors affecting your brand’s
growth. Evolving a global corporate strategy is imperative to brand consistency.
A company’s brand differentiates it from the other companies as it is the company’s trademark.
Another challenge with brand consistency is that your business must maintain consistency in
its deliverables. If the business is successful, the brand recall value increases, leading to
exponential growth in profit.
11. Environmental issues on a global level
The environmental risks and effects of global warming and climate change are evident daily.
Therefore, sustainability is high on the priority list of the foremost multinational corporations.
The UN’s Sustainable Development Goals have elevated environmental issues as the

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challenges of expanding globally. Businesses should develop and implement more
environmentally sustainable business processes.
It’s essential to be aware of the country-specific environmental regulations to expand your
business overseas and avoid legal issues in global business. This highlights the importance of
sustainable production methods and non-conventional energy resources for your production
process.
INTERNATIONALIZATION STAGES AND ORIENTATIONS
Most companies pass through different stages of internationalization. There are, of course,
many firms which have international business since the beginning, including hundred percent
export-oriented firms. Even in the case of many of the hundred per cent export-oriented firms,
the development of their international business would pass through different stages of
evolution. A firm which is entirely domestic in its activities normally passes through different
stages of internationalization before it becomes a truly global one.
There are many firms which enthusiastically and systematically go international as part of their
corporate plan. However, in the case of many firms the initial attitude towards international
business is passive and they get into international business in response to some external stimuli.
A firm may start exports on an experimental basis and if the results are satisfying in due course,
it would establish offices, branches or subsidiaries or joint ventures abroad. The expansion
process may also be characterized by increasing the product mix and the number of market
segments, markets and countries of operation. In this process the company could be expected
to become multinational and finally global.
Many experts have given different views on stages of internationalization. For our
understanding we will consider the following stages of internationalization. There are
basically five stages of internationalization and these are:
Stage 1: Domestic Operations
Stage 2: Foreign Operations (Export)
Stage 3: Joint Venture or Subsidiaries
Stage 4: Multinational Operations
Stage 5: Transnational Operations
In short, in many firms’ overseas business initially starts with a low degree of commitment or
involvement; but they gradually develop a global outlook and embark upon overseas business
in a big way.
Stage 1: Domestic Operations - The Firm is said to have a domestic market if it purely
confines its operation in the home country. Most of the international firms initiate their
operations as domestic firms. Most of the international firms originated initially as domestic
firms. Domestic firms usually have ethnocentric orientation because at the very initial stage
they do not consider going international as an option for its growth. The firm continues with
its national model of operation for some time and when the growth gets stagnated, it expands
and diversifies to new markets within the home country instead of focusing on the international
markets. However, the diminishing prospects in the domestic market and increased

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opportunities in the international markets encourage the firm to redevelop and fine tune its
strategies to explore international market opportunities and the firm moves to the next level in
the evolution and market its products to foreign markets thought suitable internationalization
technique viz., direct exports, franchise and licensing.
Stage 2: Foreign Operations (Export) – In this stage the firm expands its market through
sales efforts and the production done in the domestic market. Firm expands its market to other
countries through sales effort and retails the production facilities in the domestic market. For
examples Indian firms export nuts spices textiles, Jute and Rice all around the world. Domestic
firms being ethnocentric start its internationalization by initially involving in just exporting
goods to the foreign countries which has high demand.
Stage 3: Joint Ventures or Subsidiaries - Subsidiaries or joint ventures are the business
agreements in which firm physically transfers some of its operations out of its home country
and establishes in a foreign country. The firm in this agreement goes for a mutual cost and
profit sharing and management involved with a firm which is existing in the host country. Firm
then moves from international operations being in the home country to investment expansions
in the foreign country moves to a stage from international to Multinational and Transnational
firms.
Stage 4: Multinational Operations - In this stage a firm becomes a full-fledged multinational
corporation (MNC) with multiple production facilities established across the several locations
in the world. An international firm demands a greater degree of decentralization in decision
making though important decision in this system is always taken at corporate head quarter.
These firms operate worldwide and the orientation of the firm shifts form ethnocentric to
polycentric. A multinational firm decides to respond to market differences vis a vis social,
cultural and legal requirement and evolve as a stage three MNC which pursuits a multi domestic
strategy. In MNCs each foreign subsidiary is managed as an independent entity. The
subsidiaries are a part of regional structure in which every country has its own organization
and reports to world headquarters.
Stage 5: Transnational Operations -Firms which achieve global efficiency and local
responsiveness are called as transnational firms. These firms are highly decentralized in terms
of decision making. Every transnational business unit has freedom to take its decision with
very minimal control from corporate headquarters. However, there is no pure transnational firm
and these firms satisfy the characteristics of the global corporation.
INTERNATIONALIZATION ORIENTATIONS
Internationalization orientations refer to the different approaches or strategies that businesses
adopt when expanding their operations beyond their domestic borders. These orientations help
organizations navigate the complexities of operating in diverse international markets. There are
several internationalization orientations, and businesses may emphasize one or a combination
of these approaches based on their goals, resources, and the nature of the industry. Here are
some common internationalization orientations:
Ethnocentric Orientation: An ethnocentric orientation in international business refers to an
approach where a company's management believes that its home country's practices, products,
and management techniques are superior to those found in other countries. This orientation

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often leads to a centralized organizational structure, where decision-making and strategic
planning are primarily controlled by headquarters in the home country.
Key characteristics of an ethnocentric orientation include:
i. Global Standardization: The company tends to standardize its products, services, and
operational practices based on the norms and standards of the home country. This
may involve exporting products developed for the domestic market to international
markets with minimal adaptation.
ii. Key Decision-Making at Headquarters: Major strategic decisions are made at the
company's headquarters, and subsidiaries or branches in foreign markets are
expected to follow the established practices without much local autonomy.
iii. Limited Adaptation to Local Cultures: There is often a limited effort to adapt
products or services to meet the specific needs and preferences of local markets. The
company assumes that its domestic practices will be universally applicable.
iv. Expatriate Management: In an ethnocentric orientation, key managerial positions in
foreign subsidiaries are often filled by expatriates from the home country. This is
based on the belief that individuals familiar with the company's culture and practices
are better equipped to manage operations in foreign markets.
v. Focus on Cost Reduction and Efficiency: Companies with an ethnocentric
orientation may focus on achieving cost reductions and operational efficiency
through standardization and centralized control.

Polycentric Orientation: A polycentric orientation in international business refers to an

approach where a company tailors its products, services, and management practices to suit the
specific characteristics of each local market. Unlike the ethnocentric orientation, which
emphasizes the superiority of home country practices, the polycentric orientation recognizes
the diversity of global markets and allows for significant local autonomy in decision-making.
Key characteristics of a polycentric orientation include:
i. Local Adaptation: Companies adopting a polycentric orientation adapt their products
and services to meet the unique needs and preferences of each local market. This
may involve customization of marketing strategies, product features, and operational
practices.
ii. Decentralized Decision-Making: Decision-making authority is decentralized, with
local subsidiaries or branches having a higher degree of autonomy. Local managers
are empowered to make decisions that are more aligned with the specific conditions
of their markets.
iii. Local Management: In contrast to an ethnocentric orientation, where expatriates may
hold key managerial positions, a polycentric orientation often involves the hiring and
promotion of local managers. This allows the company to benefit from the
knowledge and understanding of local markets.
iv. Cultural Sensitivity: Companies with a polycentric orientation place a strong
emphasis on understanding and respecting local cultures. Marketing messages,
product features, and business practices are adjusted to align with cultural norms and
values.

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 v. Market Responsiveness: The polycentric approach is highly responsive to local
market conditions. Companies may develop different marketing campaigns, product
variations, and pricing strategies to address the specific demands of each market.
vi. Higher Development Costs: While the polycentric orientation may enhance local
acceptance and adaptation, it can also lead to higher development and operational
costs. Developing and maintaining unique products and marketing strategies for each
market can be resource-intensive.
Regiocentric Orientation: A regiocentric orientation in international business refers to an
approach where a company focuses its operations and strategies on a specific geographic region
rather than treating the entire world as a single market. This orientation recognizes that markets
within a particular region may share common characteristics, and thus, companies tailor their
products and strategies to the specific needs and preferences of that region.
Key characteristics of a regiocentric orientation include:
i. Regional Focus: The primary emphasis is on a specific geographic region, which may
be a group of countries with similar cultural, economic, and market conditions. This
allows companies to develop a deep understanding of the region and its dynamics.
ii. Customization for the Region: Products, services, and marketing strategies are
adapted to suit the unique characteristics of the targeted region. This customization
takes into account cultural differences, regulatory environments, and specific market
demands within the region.
iii. Decentralized Decision-Making: While there is a regional focus, decision-making
authority is decentralized within the region. Local subsidiaries or branches often have
a significant degree of autonomy to tailor strategies based on their understanding of
local conditions.
iv. Regional Management Teams: Companies adopting a regiocentric orientation may
have management teams dedicated to specific regions. These teams are responsible
for understanding regional nuances, adapting strategies accordingly, and ensuring
effective implementation within the region.
v. Economies of Scale within the Region: Rather than seeking global economies of scale,
a regiocentric approach may emphasize achieving economies of scale within the
specific region. This allows companies to benefit from regional synergies and
streamline operations accordingly.
vi. Cultural Sensitivity: Similar to the polycentric orientation, there is a focus on cultural
sensitivity. Companies aim to understand and respect the cultural diversity within the
region, tailoring their approaches to align with local norms and values.
vii. Regional Coordination: While each region may operate somewhat independently,
companies strive for coordination and integration across regions to leverage synergies
and share best practices.

Geocentric Orientation: A geocentric orientation in international business refers to an

approach where a company views the entire world as a single, integrated market and develops
standardized products, marketing strategies, and management practices that can be applied
universally across different countries. This orientation seeks to achieve a balance between
global integration and local responsiveness.
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Key characteristics of a geocentric orientation include:
i. Global Integration: The primary focus is on creating standardized products and
practices that can be applied globally. Companies aim to achieve economies of scale
by developing and producing products on a global scale, leveraging similarities
across markets.
ii. Standardization of Products and Practices: Products, services, and operational
processes are standardized to the greatest extent possible. This approach assumes
that consumers worldwide have similar needs and preferences, allowing for the
development of a consistent global offering.
iii. Global Coordination: Decision-making is centralized to some extent to ensure
coordination and consistency across different markets. The company may have a
global headquarters that oversees major strategic decisions and coordinates activities
worldwide.
iv. Global Talent Management: Companies adopting a geocentric orientation may focus
on hiring and developing a diverse workforce with global perspectives. Management
positions may be filled by individuals from any country who possess the skills and
experience necessary for the role.
v. Global Branding: Emphasis is placed on developing a global brand identity that is
consistent across markets. The goal is to create a strong, unified brand image that
resonates with consumers regardless of their geographic location.
vi. Balanced Approach to Local Adaptation: While there is a preference for
standardization, companies with a geocentric orientation recognize the importance
of some level of local adaptation. Certain aspects of products or marketing strategies
may be adjusted to accommodate unique local conditions.
vii. Strategic Use of Resources: The geocentric approach strategically allocates
resources to take advantage of global opportunities. This may involve sourcing
materials from one region, manufacturing in another, and selling in diverse markets,
depending on cost efficiencies and market demands.
Polycentric-Geocentric Mix: A polycentric-geocentric mix, also known as a poly-geocentric
or regio-geocentric approach, is a strategy that combines elements of both polycentric and
geocentric orientations in international business. This hybrid approach seeks to leverage the
benefits of local adaptation while maintaining a global perspective. Companies adopting this
mix recognize the importance of understanding and responding to local market conditions
while also striving for global integration and coordination.
Key characteristics of a polycentric-geocentric mix include:
i. Regional Adaptation: Like the polycentric orientation, there is an emphasis on
understanding and adapting to the unique characteristics of specific regions.
Products, services, and marketing strategies may be customized to suit the
preferences and needs of local markets.
ii. Global Integration: Similar to the geocentric orientation, there is a recognition of the
benefits of global integration. The company strives for consistency in certain core
elements, such as branding, product quality, and overall corporate strategy, across
various regions.

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 iii. Decentralized Decision-Making to Some Extent: Decision-making authority is
partially decentralized, especially in matters requiring adaptation to local conditions.
Local subsidiaries or regional teams may have the flexibility to make decisions based
on their understanding of regional nuances.
iv. Regional Coordination and Standardization: While there is local adaptation, efforts
are made to coordinate and standardize certain aspects of operations or products
across regions. This ensures a degree of consistency and efficiency on a global scale.
v. Global Talent Management: Companies adopting a polycentric-geocentric mix may
have a global talent management strategy, combining the use of local managers who
understand regional dynamics with global executives who bring a broader
perspective.
vi. Global Brand Management: While allowing for some adaptation at the regional
level, there is an emphasis on maintaining a strong global brand identity. Consistency
in branding helps create a unified image that resonates with consumers worldwide.
vii. Strategic Use of Resources: The mix involves strategically allocating resources
based on global opportunities and regional efficiencies. Companies may take
advantage of cost-effective production in certain regions while tailoring marketing
strategies to meet the demands of local markets.

MODES OF ENTRY INTO INTERNATIONAL BUSINESSES

Entering a new market is always a risky business, with a big potential of failure. To research
the options of entry strategy can help in determine which strategy to use. The major question
that the company face in today’s cosmic economy is what is the most suitable and appropriate
way for a company to go global, go beyond its border and enter unpractised territories on
foreign sand. The companies are very sceptical regarding the profitability and safety of the
decision. When a company is going global, these are the various areas that needs to be
addressed. These are also the issues that every company has to tackle when it puts its strategy
to enter a new market.
Each strategy has its own gain and shortcomings. Entry methods or strategies can be broadly
classified into two categories:
i. Strategic alliances
ii. Standalone entries
There are cases where companies are forced to form strategic alliances while entering new
market. This is because of inadequacy of resources, that is required to successfully service the
markets and derive profits from it.
Entry modes can be broadly classified into three groups.
The first group is entering new markets through export modes and that include
i. Indirect and Direct Exporting,
ii. Direct Agent/Distribution
iii. Direct Branch Subsidiary and other.
The second group is

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 i. Contractual Entry
ii. Licensing
iii. Franchising
iv. Technical agreements
v. Service contracts
vi. Management contracts
vii. Construction/turnkey contracts,
viii. Co-production contracts and other.
For the last one that is called investment entry mode includes
i. Sole venture or acquisition
ii. Joint venture.

EXPORT MODES
Exporting is commonly used when someone talks about export mode in general. One of the
most common options are export modes. Export modes consist of indirect entry and direct
agent/distribution.
i. Direct and Indirect Exporting
Many manufacturing firms begin their global expansion as exporters. Exporting is one of the
methods that organizations can use to enter foreign markets. In this entry method, goods and
services produced in one country are offered to sale in another country through marketing and
distribution channels. Thus, this method requires a significant investment in marketing
strategies. In reality, exporting is the most traditional and well-established form of operating in
foreign markets.
Export can either be done as Direct Export that is using an agent, distributor, or overseas
subsidiary, or acts via a government agency. It can also be done as an Indirect Export that
is products are exported through trading companies, export management companies,
piggybacking and counter-trade.
Another option for exporters is to sell products direct to foreign end-users. This option does
not incur intermediary costs and exporters have higher control over price and profits. However,
it is more practical for markets where potential buyers are limited in number or easily identified
and reached. Mail order sales and web-based B2C and B2B sales are the most common forms
of selling direct to end-users.
There is a difference between passive and active exporters. Passive exporters wait for foreign
orders that is it does not invest extra to generate sales. Whereas active exporters incur higher
cost such as marketing cost to boost up the sales.
As an entry method, exporting has several advantages. Comparing to other methods,
exporting is fairly simple and with low costs or investments and risks. Other advantages of
exporting are increased utilization of the domestic plant, thus using idle capacity and reducing
unit costs through economies of scale. Exporting also helps in diversifying markets, which
reduces the company’s exposure to domestic demand instability.

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On the other hand, the disadvantages of exporting include high transport costs, trade barriers,
tariffs, and problems with local agents. In addition, exporters have lower control of distribution
and local agents, face the risk of exchange rate fluctuations, and are subject to custom duties
and taxes in the importing counties. Although exporting costs are relatively low compared with
the other entry methods, to enter and develop these markets exporters usually incur costs to
gain exposure, set up sales and distribution networks, and attract customers. Furthermore,
products might need to be modified or redesigned, including packaging, in order to meet local
requirements or customer preferences. Similarly, linguistic, demographic and environmental
differences demand special attention to ensure exporting success.
CONTRACTUAL ENTRY MODES
These types of entry modes consist of several similar, but get different contractual
arrangements between the firms form the domestic market and the company that licenses the
intangible assets in the foreign market. This includes licensing, franchising, technical
agreements, service contracts, management contracts, construction/turnkey contracts, co-
production contracts and other. The goal is to enhance the long-run competitiveness for the
partners in the alliance and it is built on the belief that each party has something unique to
contribute to the partnership.
i. Turnkey Projects
In a turnkey project the contractor agrees to handle every detail of the project for a foreign
client including the training of operational personnel. At the completion of the contract, the
foreign client is handed the key to a plant that is ready for full operation. It is very common
in the chemical, pharmaceutical and petroleum refining industries. That is mainly used in
industries which is complex and uses expensive production technologies.
For example, the forthcoming Jewar Airport project is a turnkey project. Zurich Airport
International, a Swiss firm, is working on it. The airport will be given over to the local
government to operate after it has been completely constructed.
The advantages of this mode of entry are earning great returns from the asset. The strategy
is particularly useful where FDI is limited by host-government regulations. A turnkey project
is less risky than FDI.
Three main limitations are attached to this course of entry.
Firstly, the firm enters into turnkey deals with no long-term interest in the foreign country.
This could be a limitation if the firm subsequently proves to be a success. Secondly, a firm
entering in this way heedlessly creates competitors. And lastly, if the firm’s process
technology is a source of competitive advantage, then selling this technology through a
turnkey project is also selling competitive advantage to potential or actual competitors.
ii. Licensing
A licensing agreement is an agreement whereby a licensor grants the rights to intangible
property to another entity for a specified period, and intern the licensor receives a royalty fee
from the licensee. Intangible property includes patents, inventions, formulas, processes,
design, copyrights and trademarks. Licensing is a common method of international market
entry for companies with a distinctive and legally protected asset, which is a key

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 differentiating element in their marketing offer. Because little investment on the part of the
licensor is required, licensing has the potential to provide a very large ROI. However, because
the licensee produces and markets the product, potential returns from manufacturing and
marketing activities may be lost. Licensing to a foreign company requires a carefully crafted
licensing agreement. A great care must be taken to protect trademarks and intellectual
property.
Example: Walt Disney granting McDonalds a license for McDonalds to co-brand
McDonalds Happy Meals with a Disney trademarked character.
Licensing offers businesses many advantages, such as rapid entry into foreign markets and
virtually no capital requirements to establish manufacturing operations abroad. Returns are
usually realised more quickly than for manufacturing ventures. The other major advantage of
licensing is that, despite the low level of local involvement required of the international
licensor, the business is essentially local and is in the shape of the local business that holds
the license. As a result, import barriers such as regulation or tariffs do not apply. On the other
hand, the disadvantages of licensing are that control over use of assets may be lost over
manufacturing and marketing. The licensee usually has to obtain approval from the
international vendor for product design and specification. This is because the licensee is not
a representative of the international vendor and, compared to a distributor or franchisee, is
much more of an independent business that licenses only one specific and closely defined
aspect of the marketing offer.
iii. Franchising
Franchising is one of the entry modes that has been widely used as a rapid method of
international expansion. This is similar to licensing, although franchising tends to involve long
terms commitments than licensing. It is a more sophisticated form of licensing in which the
franchiser not only sells intangible property to the franchisee but also insists that the franchisee
agree to concede to rules and regulations of how it does business. While licensing is employed
primarily by manufacturing firms, franchising is done by service firms. Similar to that of
licensing, the franchiser typically receives a royalty payment, which amounts to some
percentage of franchisee’s revenues.
Examples of franchises include McDonalds, Subway, and Dunkin Donuts
Some of the common, but not essential, features of franchised businesses are as follows:
1. Group purchasing arrangements.
2. An exclusive territory for each franchisee.
3. Group advertising programs.
4. Initial and ongoing training and support from the franchisor.
5. Assistance from the franchisor with equipment specification, site selection and
premises fit-out and signage.
The advantages of franchising as an entry method are low costs and low risks. This in return
motivates the franchisee to build a profitable operation as quickly as possible.

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The drawback is the problem of adapting the franchised asset or brand to local market tastes.
Franchising carries this constraint is the fact that marketing budgets at local levels are usually
restricted to short-term promotions rather than market development.
iv. Contract Manufacturing
This entry mode is a cross between licensing and investment entry. The company contracts a
firm in the foreign market to assemble or manufacture the products but they still have the
responsibility for marketing and distribution of the products.
It is the process when one business outsources its manufacturing activities to another company.
This business model is regularly used in industries such as electronics, automobiles,
pharmaceuticals, food, consumer goods, and more. Typically, a client company will provide
the contract manufacturer with detailed product designs and requirements, so that the resulting
products match the client company’s specifications.
While businesses of all types and sizes utilize contract manufacturing, it’s an especially
compelling option for small to midsize businesses (SMBs). Contract manufacturing offers cost
savings to SMBs, since they don’t have to invest in production equipment and labour. This
allows an SMB to focus on its core competencies, instead of learning the ins and outs of
efficient manufacturing. Contract manufacturing also offers scalability, as SMBs can easily
ramp up production orders in response to increased customer demand.
This entry mode requires minimum investment of cash, time and executive talent; it also
provides fast entry to a new market. On the other hand, it also has potential as formidable
drawbacks like: training of potential competitor that have access to know-how and high-quality
products more over the profit from the manufacturing is transferred to the contractor.
v. Management contracts
Management contract refers to a system of outsourcing the operational control of a firm to a
different firm for it to perform all the managerial functions in exchange for certain fees under
a legal agreement. For example, an organization hires a management company to hand over
certain functions of the company to it. The management company then overtakes the function
assigned and operates it in lieu of certain fees up to 10% of the revenue generated. The first
ever recorded management contract was between Duncan Upton & Qantas in 1978.
It finds its usage mostly in those industries where the local skills do not match the skillset
required to run the business. Plus, it involves the service provider to many international and
high-class clients that require best-in-class services, amenities, and infrastructure. Moreover,
one can see it as an alternative to foreign direct investments without involving huge
investments and high risk, but it gives good returns.
Various such contracts exist, such as defense management contract agencies, project
management contracts, property management contracts, and social media management
contracts. The contract handling company needs an adept manager to handle the contract
management process. The managers, before signing the contract, must ensure the inclusion of
the three below-mentioned important components within it:
1. Duration: It specifies the period for which the contracted company will remain in charge
of the management of the firm that it hired. It has to have certain terms and conditions to

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 continue the contract. Failure to abide by them may get the contract terminated before the
duration of the contract.
2. Conditions: It forms the most critical, detailed, and extensive section of the management
contract. It contains:
➢ The identity of the parties involved
➢ The aspects of the company handed over
➢ The functions getting transferred to the management company
➢ Operational responsibilities of the management company
3. Fees: The last but most important component of the agreement is the fees. The contract
must contain the payment system and method employed for the entire duration of the
contract to the managing company. It can either be a percentage or a fixed amount of the
revenue generated by the management company.
Example: Walmart signed a fresh two-year agreement with Rubicon Technologies on Nov 2,
2022, to ensure proper waste management. Rubicon Technologies agreed to conduct waste
diversion besides daily waste collection and recycling at retail shops. In addition, the
agreement expanded the scope of the existing management contract and included green
waste collection and landscaping collection within it as well.

INVESTMENT ENTRY MODES

An investment entry mode has many names like Sole Venture, Foreign Direct Investment
(FDI), Solely Owned Subsidiary and Wholly Owned Subsidiary. Both in articles sole
venture, FDI, solely owned subsidiary and wholly owned subsidiary is connected under the
same headline, investment entry modes. A large investment in a new country can be done sole
venture with new establishment or sole venture acquisition and also joint venture. The sole
venture mode is a high investment that also brings high risks and possibility to high returns. In
sole venture mode, a firm tries to develop a foreign market by directly investing in that market.
i. Foreign Direct Investment
The Organization for Economic Co-operation and Development (OECD) define foreign
direct investment (FDI) as a category of investment that reflects the objective of
establishing a lasting interest by a resident enterprise in one economy (direct investor) in
an enterprise (direct investment enterprise) that is resident in an economy other than that
of the direct investor. Foreign Direct Investment (FDI) is a strategy approach. This entry
modes offers a high degree of control over the international business in the host country.
This is high financial commitment mode, but also a transfer of technology, skills,
management, manufacturing and marketing, production processes and other recourses. To
have unique asset or competitive advantage is often important when a firm want to
replicate their good business in on other country. According to there are several factors
that influence foreign direct investment. Both mention size of the market as one crucial
determinant to which market the company shall choose to precede with.

ii. Acquisition
Acquisition is when a company buys an established business in a foreign market. This
mode of entry has become very popular. The reason for acquiring a foreign company can
be a mix of the following reasons these are geographical changes. The acquiring of specific
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 asset like management, technology, product diversification, sourcing of raw material or
other products of sale outside the host country or financial diversification etc. When you
acquire a company, the success depends on the selection process on which company to
buy, therefore is the possible advantages not certain. The specific advantages can be a
faster start in the new market due to establish firm, new product line and a short payback
period due to immediate income for the investors. The disadvantages on the other hand are
transfers of ownership and control and hard to evaluate the prospects, but several of the
advantages can turn in to disadvantages if it is not handled right.
For an Example, Disney really knows what it’s doing when it comes to acquiring other
profitable companies. The entertainment behemoths first acquired Pixar in 2006 for a
cool $7.4 billion. Although a staggering fee, the now joint studio has since released hits
such as WALL-E and Toy Story 3, generating billions in revenue. Three years after
acquiring Pixar, Disney completed the same process with Marvel Entertainment. Like
with Pixar, the subsequent films that were produced brought in billions at the box office.
With each successful blockbuster, these acquisitions look more and more successful.
Some other examples of acquisitions include:
Google’s $50 million acquisition of Android in 2005
Pfizer’s $90 billion acquisition of Warner-Lambert in 2000
Anheuser-Busch InBev’s $100 billion acquisition of SABMiller in 2016

iii. Joint Ventures

A joint venture means establishing a firm that is jointly owned by two or more otherwise
independent firms. This is a popular mode of entry. The term Joint Venture applies to those
strategic alliances where there is equity participation from both the foreign entrant and the
local collaborator. The equity participation can be of different ratios, ranging from a
minority stake, equal stake to a controlling stake or a more predominant majority stake.
The advantages attached to this mode of entry are reduction in the capital risk because the
costs are being shared, benefit of the firm from local partner’s knowledge of the host
country’s competitive conditions, culture, language, political systems and business. In
many countries political conditions dictate this entry to be the only feasible mode of entry.
Many companies avoid joint venture due to complexities involved in coordinating policies,
decisions, and execution with a different company. Other drawbacks are distinct difference
in culture, managerial styles and communication barrier.
For an Example, Car manufacturer BMW formed a joint venture with the Chinese
Automobile manufacturer Brilliance Auto Group in 2003. The venture, named BMW
Brilliance, was formed to produce and sell BMW cars in China. The partners jointly
agreed to invest €450 million in the venture, with BMW taking a 50% stake in the child
company while Brilliance Auto took a 40.5% stake. The remaining 9.5% went to the
Shenyang municipal government.

iv. Wholly Owned Subsidiary

Many organizations prefer to establish their presence in foreign markets with 100%
ownership through wholly owned subsidiaries. Under this method, organizations obtain
greater control over operations and higher profits since there is no ownership split
agreement. However, such entry method requires large investments and faces higher risks,

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 especially in the political, legal and economical arenas. There are two approaches for the
wholly owned subsidiaries entry method; one is through acquisition and the other through
greenfield investments. Greenfield investment means using funds to build an entirely new
facility. Though such approach entails full control and no risk of cultural conflicts, its costs
are extremely high, and returns on investment are obtained in the long-run due to the extent
of time required to build the facility, start operations, and attain economies of scale and the
experience-curve. In contrast, acquisition allows organizations to get to the foreign market
faster. Organizations taking the acquisition approach use its funds to buy existing facilities
and operations. This is done by acquiring the equity of the firm that previously owned the
facility. There are several advantages of wholly owned subsidiaries. Firstly, when a firm’s
competitive advantage is based on technological competence, a wholly owned subsidiary
will often be a preferred mode of entry because it reduces the risk of losing control over
that competence. Many technologically sound firms prefer this mode for entering foreign
market. Secondly, the wholly owned subsidiary gives a firm tight control of operations in
different countries. Lastly a wholly owned subsidiary may be required if a firm is trying
to realise location and experience curve economies.
For an Example, Googles Acquisition of YouTube, Nestles Acquisition of Gerber (Gerber
is an American baby food and baby products brand), Walmart’s Acquisition of Flipkart
This is considered to be the costliest method of serving a foreign market. Firms choosing this
mode of entry has to incur total capital costs and undertake the risks of setting up overseas
operations. The risks are a bit lower if host country enterprise is acquired. But acquisitions have
different set of problems and the decision to go for acquisition or greenfield ventures is very
crucial.
FACTORS TO BE CONSIDERED BEFORE ENTERING
The choice of entry must be based on an assessment of a nation’s long run profit potential. This
potential is a function of the following factors:
1. Timing of Entry: Once attractive markets have been identified, it is important to consider
the timing of entry. Entry is early when an international business enters a foreign market
before other firms and late when it enters after other international businesses have already
established themselves. The advantages associated with entering early is known as First
Mover Advantages.
Advantages of First Mover:
i. Ability to preempt rivals and capture demand by establishing a strong brand name.
ii. Ability to build sales volume
iii. Increase in experience in that country which results into decrease in cost.
iv. Ability to create switching cost that tie customers into their products and services
Disadvantages of First Mover:
i. Rise of pioneering costs (costs of promoting and establishing a product offering)
ii. Change in regulation in the host country

2. Scale of Entry: Another issue that an international business needs to consider when
contemplating market entry is the scale of entry. Entering the market on a large scale
involves the commitment of significant resources. Entering the market on a large scale

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implies rapid entry. Whereas on the other hand small scale entry is a way to gather
information about foreign market. But the lack of commitment associated by small
scale entry may make it more difficult for the small-scale entrant to build market share
or to capture first mover advantages. Small scale entrant is more risk averse than the
large-scale entrant.

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