INB10002

International Business Operations

TOPIC : Forms of International Business

Learning Objectives

At the end of this lesson, students will be able to

 Describe the basic forms of international business activities

 Identify the various activities that enable a firm to enter or penetrate
foreign markets, increase market share and enhance the profitability
of the enterprise. 9

 Recognize foreign business opportunities, consider the factors

affecting the selection of a particular business form or combination
of forms, and select a number of options for market entry.
 Introduction
 Globalization has contributed in the increase in international trade and
the ability of a company to diversify its business to other countries.
 Globalization is the process by which people, products, information and
money can move freely across borders.
 Firms have multiplied their presence outside their country of origin. With
access to new markets, a business has the potential to market their
product and services outside their domestic market and build a new
customer base. 9

 Globalization is the phenomenon of the transition of industries whose

competitive structure changes progressively from multinational to
global.
 Globalization of the World Economy
OPPORTUNITIES for FIRMS CHALLENGES for FIRMS
• Wider scope of markets
• Government regulation
• Growth potential
• Cultural diversity
• Wider access to resources:
• Need for adaptation?
• Labor
• Cross border management
• Raw materials
•Currency Fluctuation ?
• Components
•Legal requirements?
• Knowledge
• Ability to gain costs advantages
through economies of scale
Globalization
 Going global demands firms take into consideration several factors:
 First, there is the need to assess the attractiveness of the country,
either in absolute terms or relative to another country. This is
generally known as ‘country attractiveness analysis’.
 Second, there is the need to decide on the form of entry. This is
generally known as ‘entry strategy’.

 Country attractiveness is a function of the

 Market and resources prospects
 The competitive context
 The risks of operating in a country
MARKET, RESOURCES AND INDUSTRY
OPPORTUNITIES

 Market opportunities assessment measures the potential demand in

the country for the products or services of the firm:
 Market size
 Market growth
 Quality of demand.

 Resources opportunities:
 Natural resources
 Human resources
 Infrastructure and support industries resources.
Assessing Market Opportunities
 The classic tools of market forecasting and analysis are presented here, in a
logical sequence. Broad assessment of the overall demand, given
macroeconomic data

 Plotting trends
• Look at the potential size of a market also gives an insight into the
potential future demand
 The Middle-Class Effect
• The demand for most of the mass consumer goods is often triggered
by the presence of an affluent middle class
 Quality of Demand
• Describe the nature and diversity of market segmentation prevalent in
a country and the profile of the customer value curve
ASSESSING RESOURCE OPPORTUNITIES

 Natural resources
 Countries that do not use their natural resources for national consumption
tend to export raw materials, to promote processing by domestic companies
or to invite foreign firms to invest in processing and export.

 Human resources
 The quality and cost of labor was the cause of the migration of international
investments that took place in the 1950s and 1960s. Low labor-cost
countries tend to attract labor-intensive, low value-added production.

 Infrastructure and support industry resources

 The quality of communication and logistics infrastructures, as well as the
availability of supporting industries and services can be of interest to foreign
investors
Competitive Context
 Determining the profitability potential of a company presence in a
country given its industry and competitive structure.

 Professor Michael Porter proposed the concepts and techniques of

industry analysis for strategic decision making in his seminal book
Competitive Strategy (1980).

 According to Porter there are five forces that determine the long-term
profitability potential of an industry
Country Risk Analysis
 The purpose of country risk analysis is to assess the probability that
adverse circumstances owing to political, economic or social actions
will negatively affect business performance.

 Country risks can be grouped into four categories :

❖ Political
❖ Economic
❖ Competitive
❖ Operational
Take home lesson:
Cartel is a formal agreement
among firms in an oligopolistic
industry. Cartel members may
agree on such matters as prices,
total industry output, market
shares, allocation of customers,
allocation of territories, bid-rigging,
establishment of common sales
agencies, and the division of profits
or combination of these.
The Path to Internationalization
Stages of Globalization
 The evolution from a domestic to a truly global
organization may involve many and diverse steps
Export Department Structure
 At early internationalization stage, exporting tend to be handles by an
intermediary (foreign agent/distributor) due to local market knowledge is
critical.
 Further growth in the exporting will lead to the establishment of an export
department at the same level of the domestic sales department.
 Exporting is controlled by the domestic home office.
Export
 Direct Export
– Direct exporting refers to the sale in the foreign market by the manufacturer
himself. (Ethnocentric orientation)
– A manufacturer does not use any middlemen in the channel between the home
country and overseas market.
– The exporter will be responsible for handling the sales process, logistics of
shipment, foreign distribution, and for collecting payment.
 Indirect Exporting
– The process of selling products to an intermediary, who will then sell your products
directly to customers or importing wholesalers.
• Involvement of commission agents, buying agents, large foreign wholesalers
and retailers and export management companies (EMCs)
Advantages and Disadvantages of Direct Exports

Advantages Disadvantages
• Growth potential is • High transportation cost
significantly higher than that • May not be able to face
from indirect exporting. more aggressive What are
• Products can be customized to competition some
suit foreign markets. • Little or no direct contact associated
• Investment is less with customers, unlikely to risks?
be able to react to changes
in customer needs
• Frequent foreign travel
• Low control
Advantages and Disadvantages of Indirect Exports

Advantages Disadvantages
• Low investment - capital • Minimal returns
and personnel resources. • Insecure
• Less complex • Lack of market knowledge What are
• Gains initial knowledge and adaptability some
and entry to new markets • Lack of commitment of associated
• Agents and EMCs may agents/EMCs risks?
have better knowledge of
the market
 Export
• An important factor in exporting is
the need to translate something
about a product or service into
the language of the target foreign
market.
– Laws and regulations
– Appropriateness, cultural
sensitivity.
US companies doing business in the
French-speaking Canadian province of
Quebec.
– 'lait frais usage', which translates to
“used fresh milk,” (company wanted to
brag of lait frais employé, or “fresh milk
used)
– The “terrific” pens sold by a company
were promoted as 'terrifiantes', or
terrifying.
– A company's product to “reduce
heartburn” was advertised as one that
reduced “the warmth of heart”!
Source - David A. Ricks, Blunders in International Business
(Hoboken, NJ: Wiley-Blackwell, 1999),
Sales Subsidiary Structure
 As the firm develops expertise in foreign markets, agents an distributers are replaced by the
direct sales and establishment of sales subsidiaries/ branch offices in the foreign country.
 Export manager is given the same authority a other functional managers
 Exporting is still controlled at corporate headquarters, however the firms needs to make
decision on the coordination of sales subsidiary.
 To maintain direct control (ethnocentric approach), need to staff the sales subsidiary from
headquarter through the use of PCNs
 Country specific factors (polycentric approach), the need of knowledge on foreign market,
language or sensitivity to host country needs, staff the subsidiary with HCNs.
Foreign Marketing Subsidiary
– Investment in foreign marketing
– Manufacturing is retained at home
– Wholly owned or partnership arrangements with locals
– The foreign marketing subsidiary will handle promotional activities, sales,
distribution, and in extreme cases retailing.
– Capital Investment (outside the home country)
– The firms has presence in the foreign country (as compared to exports)
– More control
– Subject to local laws of packaging, pricing and etc.
– Works well where modifications to the core product need not be made and where
a foreign product has a superior reputation
Advantages and Disadvantages of
Foreign Marketing Subsidiary

Advantages
• Control
• Gains better knowledge of
the foreign market
• Sensitive to the needs of
local stakeholders
• Opportunity to grow and
compete
Disadvantages
• May not be able to adapt -
physical aspects of the
product may not be
suitable
• Consumer rejection
• Government control
 International Division
 The establishment of a sales subsidiary to a foreign production or service facilities.

 The establishment of a foreign production/ service operations creates a separate

international division in which all international activities are grouped.

 At this stage of internationalization, many firms are concerned about maintaining control of
the newly established subsidiary and will place PCNs in all key positions in the subsidiary.
Foreign Markets Entry Mode
 A company’s entry strategy involves answering three questions:

 Why does the company want to enter the country?

 When is it appropriate to enter?
 How can it enter?

 There are six legal forms of entry:

 wholly owned operations built from scratch

 acquisitions,
 joint ventures
 licensing or franchising
 distributors’ agreements
 a representative office.
Foreign Markets Entry Mode
 The various types of entry mode are generally be determined by the
following factors :

 The overall attractiveness of the market

 The political and operational risks involved.
 The government requirements.
 The time pressures.
 The internal capabilities of the firm to enter and develop
 local resources, assets and competencies in order to gain and sustain
competitive advantage.
 The strategic objectives and the expected return on investment (ROI).
 Wholly Owned Subsidiaries | Foreign Manufacturing
Subsidiary
 This entry mode is the one that gives the most control over operations, but also
involves the highest mobilization of resources and competencies bears the highest
risks. A wholly owned investment demands that foreign investors bear the full risk of
equity and debt financing,

 A further obstacle of a greenfield operation is

 The need for recruitment, training and management of a local workforce
 The capacity of expatriate personnel to quickly get culturally acclimatized
 The building, outfitting, running and maintaining an entire manufacturing operation.

 On the positive side, a greenfield, wholly owned investment gives the investor full
control over operations and access to the full profitability of the investment.
Advantages and Disadvantages of Foreign
Manufacturing Subsidiary
Advantages
• High level of control
• Maintain quality and after-sales
service standards
• IP, know how etc..... protected
• Direct contact with market,
consumers
• High profitability and growth
opportunity
Disadvantages
• High level of investment and
commitment of resources
• Need to maintain high level of
diplomacy with local government
and communities
• High risk
• Susceptible to local government
restrictions, labour union actions
and media etc.....
• Not suitable for smaller
organisations that may not have
resources and knowledge of
foreign markets
• Complicated registration
process
 Acquisition is the purchase of an entity by another entity. This can be done either by
acquiring ownership over 51% of its share capital or by taking over the assets of the
company.

 The advantage of acquisitions as an entry mode

 the immediate availability of resources, assets and competencies that saves time for
the foreign investor.

 Another advantage is the access provided to a market of resources when the competitive
arena is already well occupied and the window of opportunity is closed.

 On the less positive side, acquisitions in foreign environments demand cross cultural
integration skills
 Joint Ventures
 A joint venture (JV) is a business arrangement in which two or more parties agree to pool
their resources for the purpose of accomplishing a specific task.

 Joint Ventures
– Ownership may be shared between the home company and local country government or
private individuals.
– Joint ventures involve the creation of a new entity by the partnering firms with the view of
sharing equity and profits
– Joint venture partners provide expertise
– Since there is local ownership, more acceptance and legitimacy
– Nationalistic nations prefer and even support joint ventures i.e. China, India
– One party may be the dominant partner in a joint venture

With Brexit, what are the implications to

joint ventures in the UK?
Advantages and Disadvantages of Joint Ventures
Advantages
• Lower capital investment
• Gives the firm the ability to
enter more markets
• Less opposition and control
from local community, labour
unions and governments -
reduce political friction
• Sensitive to local conditions
and taste
• Competitive advantage
through combined strengths
and expertise
• Avoid potential competition
from local firms by joining them
• Capacity building - acquiring
new capabilities and skills
Disadvantages
• Local partner may attempt to
control
• Products may not get fair and
equitable treatment from the
local partner
• Conflicts - Objectives and
motives of the partners may
clash (i.e. profit motives,
choosing suppliers etc.....)
• Need to be extremely cautious
when choosing joint venture
partners
• Cultures of the organisations
may clash
 Licensing| Franchising | Agents
 When a direct investment is not justified, foreign companies can still
establish a presence in a particular country by contracting an agreement in
the form of a license, a franchise, an agency or a distribution contract.

 These contractual arrangements are made when one or more of the

following characteristics are present:
• The market is too small for the company to justify a full investment.
• The country is perceived as too risky.
• There is already a direct investment in a nearby country and an
additional one would be redundant.
• The government does not allow any other form of presence.
• The company wants to test the market.
Licensing Agreements
 Licensing agreements are contractual arrangements by which a company (the
licensor) transfers to another company (the licensee) its product and/or process
technology with the right to exploit it commercially.

 The brand name of the licensor may or may not be part of the licensing agreement.

 Example: Walt Disney granting McDonalds a license for McDonalds to co-brand its
McDonalds Happy Meals with a Disney trademarked character in exchange for a
percentage of revenue or a fee.
 Franchising
 Franchises are another form of indirect contractual
arrangement through which the franchiser grants
the franchisee the right to use its name and receive
financial compensation in a similar way to the
licensing agreement (fixed plus royalties).

 The franchiser generally forces the franchisee to

adopt a certain number of operating policies so that
it can maintain a standard level of quality
associated with its brand name

 Examples of well-known franchise business models

include McDonald’s, Pizza Hut, Burger King, and
Dunkin' Donuts
Advantages and Disadvantages
Licensing/ Franchising
Advantages Disadvantages
• Low investment • Risk - reputation
• Subject to less • Minimal monetary return
governmental regulation • Low degree of control
• Can enter into a large • Licensee can copy the
number of countries using product when patents
this mode expire or simply substitute
• Does not require their own product.
knowledge of the foreign
market
• Less bureaucratic
tangles
• Huge potential for profit
and growth - i.e. technology
sector
LOCAL AGENTS AND DISTRIBUTORS
 The appointment of a local agent or distributor is probably the most frequent mode of
entry for the thousands of SMEs that want to reach international markets.

 For the most established large multinational enterprises, this is also an option to reach
countries that are either risky or whose size does not justify a major investment.

 The main advantage of distribution agreements is that they require a limited amount of
resource from the global firm

 The main disadvantages are the lack of contact with the market and the conflict of
interest that can emerge when sales reach a certain level.
Representative & Technical Office
 The representative office is another very frequent entry mode, considered as a
stepping stone or a beachhead.
 In China, Russia, Vietnam and newly opened countries this type of entry
consists of sending an expatriate manager to collect information, establish
contacts, organize direct sales, lobby for licenses, negotiate distribution or joint
venture agreements and recruit local personnel.

 Technical offices are another form of entry.

 Technical offices are most relevant when the country is considered to be a
source of technological innovation and a presence can give access to useful
contacts and information.
Procurement Office
 Procurement or purchasing offices
 Most appropriate for large retailers or big commodity buyers who set
up an office in order to be close to suppliers, to negotiate contracts
and to control their execution.

 Some companies specialize in buying for third parties and are used by
firms which do not want to commit resources to establishing their own
office.