Modes of International Business- Modes of entry in Foreign Market

A careful analysis of various factors have to be done before entering a foreign market in order to choose to most profitable market. These factors are :-

A) Country Specific Factors –

• Laws and Regulation of the Country
• Infrastructural Conditions
• Property rights and Legal framework
• Political Factors
• Cultural Factors

B) Industry Specific Factors –

• Entry and Exit Barriers
• Industrial Complexity
• Uncertainity in Industrial environment
• Supply and Distribution pattern

C) Firm Specific Factors

• Resources of the firm
• Technological Risk
• Goals and Objectives of the Firm
• Experience of the Firm

D) Project Specific Factors –

• Size of the Project
• Project Orientation
• Availability of raw material and labour required for project implementation 
• Availability of suitable market for the project

Modes of entry in foreign market →

(1) Exporting – It is the process of selling goods and services produced in one country to other country.  Exporting may be direct or indirect. 

Under direct export – A company capitalizing on economies of scale in production concentrated in the home country, establishes a proper system for organizing export functions and procuring foreign sales.

Indirect export involves exporting through domestically based export intermediaries. The exporter has no control over his product in the foreign market.

Advantages –

1. It helps in distribution of surplus
2. It is less costly
3. It is less risky
4. Under direct export the exporter has control over selection of market
5. It helps in fast market access

Disadvantages –

1. High start-up cost in case of direct exports
2. The exporter has little or no control over distribution of products
3. Exporting through export intermediaries increase the cost of product

(2) Joint Venture – It is a strategy used by companies to enter a foreign market by joining hands and sharing ownership and management with another company. It is used when two or more companies want to achieve some common objectives and expand international operations. The common objectives are –

• Foreign market entry
• Risk/reward sharing
• Technology sharing
• Joint product development
• Conforming to government regulations

It is useful to meet shortage of financial resources, physical or managerial resources

Advantages –

1. Technological competence
2. Optimum use of resources
3. Partners are able to learn from each other

Disadvantages –

1. Conflicts over asymmetric investments
2. It may be costly
3. Cultural and political stability may pose a threat to successful operations
4. Conflicts in management

(3) Outsourcing – It is a cost effective strategy used by companies to reduce costs by transferring portions of work to outside suppliers rather than completing it internally.  It includes both domestic and foreign contracting and also off shoring (relocating a business function to another country).

Advantages –

1. Swiftness and expertise in operations
2. Concentration on core process rather than supporting ones
3. Risk sharing
4. Reduced costs

Disadvantages

1. Risk of exposing confidential data
2. Hidden costs
3. Lack of customer focus

(4) Franchising – It is a system in which semi-independent business owners (franchisees) pay fees and royalty to a parent company (franchiser) in return for the right to be identified by its trademark, to sell its product or services, and often to use its business format or system.

Advantages –

1. It is less risky
2. Advantage of expertise of franchiser
3. Highly motivated employees

Disadvantages

1. Difficulty in keeping trade secrets
2. Franchisee may become a future competitor
3. A wrong franchisee may ruin company’s name and goodwill

(5) Turn Key Project – It involves the delivery of operating industrial plant to the client without any active participation. A company pays a contractor to design and construct new facilities and train personnel to export its process and technology to another country. Turn key projects may be of various types –

BOD – Build, Owned and Develop

BOLT – Build, Owned, leased and Transferred

BOOT – Build, Owned, Operate and Transfer  

(6) Foreign Direct Investment – It is a mode of entering foreign market through investment.  Investment may be direct or indirectly through Financial Institutions. FDI influences the investment pattern of the economy and helps to increase overall development. The extent to which FDI is allowed in a country is subjected to the government regulations of that country. It can be done by purchasing shares of a company, property and assets.

Advantages –

1. Modifications can be made at any point of time
2. It is an easy mode of entry

Disadvantages

1. The government policies may not be helpful
2. The return on Investment may be low

(7) Mergers & Acquisitions –  A merger is a combination of two or more district entities into one, the desired effect being accumulation of assets and liabilities of distinct entities and several other benefits such as, economies of scale, tax benefits, fast growth, synergy and diversification etc. The merging entities  cease to be in existence and  merge into a single servicing entity.

Acquisition implies acquisition of controlling interest in a company by another company.  It does not lead to dissolution of company whose shares are acquired. It may be a friendly or hostile acquisition or a bail out takeover.

(8) Licensing – Licensing is a method in which a firm gives permission to a person to use its legally protected product or technology (trademarked or copyrighted) and to do business in a particular manner, for an agreed period of time and within an agreed territory. It is a very easy method to enter foreign market as less control and communication is involved. The financial risk is transferred to the licensee and there is better utilization of resources.

Advantages –

1. Easy appointment
2. Less investment is involved
3. Low cost of labour

Disadvantages

1. This method is time consuming
2. Decline in product quality may harm the reputation of licensor

(9) Contract manufacturing – When a foreign firm hires a local manufacturer to produce their product or a part of their product it is known as contract manufacturing. This method utilizes the skills of a local manufacturer and helps in reducing cost of production. The marketing and selling of the product is the responsibility of the international firm.

Advantages –

1. Low cost of production
2. Development of medium and small scale industries
3. No dilution of control

Disadvantages –

1. Difficulty in maintaining quality standards
2. Local manufacturers in foreign market may lose business

(10) Strategic Alliance – It is a voluntary formal agreement between two companies to pool their resources to achieve a common set of objectives while remaining independent entities. It is mainly used to expand the production capacity and increase market share for a product. Alliances help in developing new technologies and utilizing brand image and market knowledge of both the companies.