International Entry Modes Of An Entrepreneur

Modes of entry into an International Business:A mode of entry into an international market is the channel which an organization try to gain entry to a new international market. . There are modes of

entry into international markets such as the Internet, Exporting, Licensing, International Agents, International Distributors, Strategic Alliances, Joint Ventures, Overseas Manufacture and International Sales Subsidiaries. Foreign market entry modes differ in degree of risk they present, the control and commitment of resources they require and the return on investment they promise. There are two major types of entry modes: Equity Non-equity modes. The non-equity modes category includes export and contractual agreements. The equity modes category includes: joint venture and wholly owned subsidiaries There are some basic decisions that the firm must take before foreign expansion like: which markets to enter, when to enter those markets, and on what scale. Which foreign markets? -The choice based on nations long run profit potential .-Look in detail at economic and political factors which influence foreign markets .-Long run benefits of doing business in a country depends on following factors :- Size of market (in terms of demographics) - The present wealth of consumer markets (purchasing power) - Nature of competition By considering such factors firm can rank countries in terms of their attractiveness and long-run profit.

Timing of entry:It is important to consider the timing of entry. Entry is early when an international business enters a foreign market before other foreign firms. And late when it enters after other international businesses .The advantage is when firms enters early in the foreign market commonly known as first-mover advantages.

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International Entry Modes Of An Entrepreneur

First mover advantage1. It is n the ability to prevent rivals and capture demand by establishing a strong brand name. 2. Ability to build sales volume in that country.so that they can drive them out of market. 3. Ability to create customer relationship.

Disadvantage1.Firm has to devote effort, time and expense to learning the rules of the country. 2.Risk is high for business failure (probability increases if business enters a national market after several other firms they can learn from other early firms mistakes).

Modes of entry1. Exporting 2. Licensing 3. Franchising 4. Turnkey Project 5. Mergers & Acquisitions 6. Joint Venture 7. Acquisitions & Mergers8. Wholly Owned Subsidiary

EXPORTINGIt means the sale abroad of an item produced , stored or processed in the supplying firms home country. It is a convenient method to increase the sales. Passive exporting occurs when a firm receives canvassed them. Active exporting conversely results from a strategic decision to establish proper systems for organizing the export functions and for procuring foreign sales.

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International Entry Modes Of An Entrepreneur

There are two types of exporting: direct and indirect. Direct Exports Direct exports represent the most basic mode of exporting, capitalizing on economies of scale in production concentrated in the home country and affording better control over distribution. Direct export works the best if the volumes are small. Large volumes of export may trigger protectionism. Types of Direct Exporting: Sales representatives represent foreign suppliers/manufacturers in their local markets for an established commission on sales. Provide support services to a manufacturer regarding local advertising, local sales presentations, customs clearance formalities, and legal requirements. Manufacturers of highly technical services or products such as production machinery, benefit the most form sales representation. Importing distributors purchase product in their own right and resell it in their local markets to wholesalers, retailers, or both. Importing distributors are a good market entry strategy for products that are carried in inventory, such as toys, appliances, prepared food.

Advantages Of Exportinga) Need for Limited FinanceIf the company selects a company in the host country to distribute the company can enter international market with no or less financial resources but this amount would be quite less compared to that would be necessary under other modes . b) Less RisksExporting involves less risk as the company understand the culture , customer and the market of the host country gradually. Later after understanding the host country the company can enter on a full scale.

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International Entry Modes Of An Entrepreneur

c) Motivation for ExportingMotivation for exporting is proactive and reactive. Proactive motivations are opportunities available in the host country. Reactive motivators are those efforts taken by the company to export the product to a foreign country due to the decline in demand for its product in the home country.

Disadvantage:
Higher start-up costs and higher risks as opposed to indirect exporting Greater information requirements Longer time-to-market as opposed to indirect exporting.

Licensing :
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. Summarizing, in this foreign market entry mode, a licensor in the home country makes limited rights or resources available to the licensee in the host country. The rights or resources may include patents, trademarks, managerial skills, technology, and others that can make it possible for the licensee to manufacture and sell in the host country a similar product to the one the licensor has already been producing and selling in the home country without requiring the licensor to open a new operation overseas. The licensor earnings usually take forms of one-time payments, technical fees and royalty payments usually calculated as a percentage of sales.

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International Entry Modes Of An Entrepreneur

As in this mode of entry the transference of knowledge between the parental company and the licensee is strongly present, the decision of making an international license agreement depend on the respect the host government show for intellectual property and on the ability of the licensor to choose the right partners and avoid them to compete in each other market. Licensing is a relatively flexible work agreement that can be customized to fit the needs and

Advantages1. Low investment on the part of licensor. 2. Low financial risk to the licensor. 3. Licensor can investigate the foreign market without much efforts on his part. 4. Licensee gets the benefits with less investment on research and development. 5. Licensee escapes himself from the risk of product failure.

Disadvantages1. It reduces market opportunities for both. 2. Both parties have to maintain the product quality and promote the product. Therefore one party can affect the other through their improper acts. 3. Chance for misunderstanding between the parties. 4.Chance for leakages of the trade secrets of the licensor. 5. Licensee may develop his reputation. 6. Licensee may sell the product outside the agreed territory and after the expiry of the contract.

Franchising
The Franchising system can be defined as: A system in which semiindependent business owners (franchisees) pay fees and royalties to a parent company (franchiser) in return for the right to become identified with its trademark, to sell its products or services, and often to use its business format and system. Compared to licensing, franchising agreements tends to be longer and the franchisor offers a broader package of rights and resources which usually includes: equipments, managerial systems, operation manual, initial trainings, site approval B.I.E.T MBA PROGRAMME, DAVANGERE

International Entry Modes Of An Entrepreneur

and all the support necessary for the franchisee to run its business in the same way it is done by the franchisor. In addition to that, while a licensing agreement involves things such as intellectual property, trade secrets and others while in franchising it is limited to trademarks and operating know-how of the business. The key success for franchising is to avoid sharing the strategic activity with any franchisee especially if that activity is considered importance to the company. Sharing those strategic activity may increase the potential of the franchisee to be our future competitor due to the knowledge and strategic spill over The franchisor provides the following services to the franchisee.1. Trade mark 2. Operating Systems 3. Product reoutation 4. Continuous support system like advertising, employee training, reservation services quality assurances program etc.

Advantages:
1. Low investment and low risk 2. Franchisor can get the information regarding the market culture, customs and environment of the host country .3. Franchisor learns more from the experience of the franchisees .4. Franchisee get the benefits of R& D with low cost .5. Franchisee escapes from the risk of product failure.

Disadvantages
1.It may be more complicating than domestic franchising 2. It is difficult to control the international franchisee 3. It reduces the market opportunities for both 4. Both the parties have the responsibilities to maintain product quality and product promotion 5. There is a problem of leakage of trade secrets 6.Comparing to other modes such as exporting and even licensing, international franchising requires a greater financial investment to attract prospects and support . B.I.E.T MBA PROGRAMME, DAVANGERE

International Entry Modes Of An Entrepreneur

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. Example- nuclear power plants , airports, oil refinery , national highways , railway line etc. Hence they are multiyear projects.

WHOLLY OWNED SUBSIDIARY:

A wholly owned subsidiary includes two types of strategies: Greenfield investment and Acquisitions. Greenfield investment and acquisition include both advantages and disadvantages. To decide which entry modes to use is depending on situations.Greenfield investment is the establishment of a new wholly owned subsidiary. It is often complex and potentially costly, but it is able to full control to the firm and has the most potential to provide above average return. Wholly owned subsidiaries and expatriate staff are preferred in service industries where close contact with end customers and high levels of professional skills, specialized know how, and customization are required. Greenfield investment is more likely preferred where physical capital intensive plants are planned. This strategy is attractive if there are no competitors to buy or the transfer competitive advantages that consists of embedded competencies, skills, routines, and culture. Greenfield investment is high risk due to the costs of establishing a new business in a new country. A firm may need to acquire knowledge and expertise of the existing market by third parties, such consultant, competitors, or business partners. This entry strategy takes much time due to the need of establishing new operations, distribution networks, and the necessity to learn and implement appropriate marketing strategies to compete with rivals in a new market. Acquisition has become a popular mode of entering foreign markets mainly due to its quick access. Acquisition strategy offers the fastest, and the largest, initial international expansion of any of the alternative.

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International Entry Modes Of An Entrepreneur

Acquisition has been increasing because it is a way to achieve greater market power. The market share usually is affected by market power. Therefore, many multinational corporations apply acquisitions to achieve their greater market power require buying a competitor, a supplier, a distributor, or a business in highly related industry to allow exercise of a core competency and capture competitive advantage in the market. Acquisition is lower risk than Greenfield investment because of the outcomes of an acquisition can be estimated more easily and accurately.[25] In overall, acquisition is attractive if there are well established firms already in operations or competitors want to enter the region.

On the other hand, there are many disadvantages and problems in achieving acquisition success. Integrating two organizations can be quite difficult due to different

organization cultures, control system, and relationships. Integration is a complex issue, but it is one of the most important things for organizations. By applying acquisitions, some companies significantly increased their levels

of debt which can have negative effects on the firms because high debt may cause bankruptcy. Too much diversification may cause problems. Even when a firm is not too over diversified, a high level of diversification can have a negative effect on the firm in the long term performance due to a lack of management of diversification.

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.

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International Entry Modes Of An Entrepreneur

Advantages:
1. The company immediately gets the ownership and control over the . acquired firms factories, employee, technology ,brand name and distribution networks 2. The company can formulate international strategy and generate

morerevenues.3. If the industry already reached the stage of optimum capacity level or overcapacity level in the host country. This strategy helps the host country.

Disadvantages:
1. Acquiring a firm in a foreign country is a complex task involving bankers, lawyers regulation, mergers and acquisition specialists from the two countries 2. This strategy adds no capacity to the industry. 3. Sometimes host countries imposed restrictions on acquisition of local companies by the foreign companies. 4. Labor problem of the host countrys companies are also transferred to the acquired company

Joint Venture:
Two or more firm join together to create a new business entity that is legally separate and distinct from its parents. It involves shared ownership.Various environmental factors like social , technological economic and political encourage the formation of joint ventures. It provides strength in terms of required capital. Latest technology required human talent etc. and enable the companies to share the risk in the foreign markets. This act improves the local image in the host country and also satisfies the governmental joint venture.

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International Entry Modes Of An Entrepreneur

Advantages:
1.Joint venture provides large capital funds suitable for major projects. . 2.It spread the risk between or among partners. 3.It provide skills like technical skills, technology, human skills, expertise, marketing skills. 4. It make large projects and turn key projects feasible and possible. 5.It synergy due to combined efforts of varied parties.

Disadvantages:
1. Conflict may arise. 2. Partner delay the decision-making once the dispute arises. Then the operations become unresponsive and inefficient. 3. Life cycle of a joint venture is hindered by many causes of collapse. 4. Scope for collapse of a joint venture is more due to entry of competitors changes in the partners strength. 5.The decision-making is slowed down in joint ventures due to the involvement of a number of parties.

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