Forms of International Business

Management > International Business Management > Introduction to International Business > Forms of International Business

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In an increasingly interconnected world, companies are finding it essential to look beyond their domestic borders for growth and diversification. Engaging in international business allows firms to expand their customer base, gain access to new resources, and increase profitability. However, the methods by which a company enters a foreign market can vary significantly based on its strategic goals, resources, and risk tolerance. This article explores the major forms of international business—exporting, licensing, franchising, joint ventures, foreign direct investment (FDI), and strategic alliances—and examines the advantages and disadvantages of each approach.

Forms of International Business

Exporting

Exporting is often the first step for companies looking to enter the international market. In this model, businesses sell their goods or services directly to foreign customers or through intermediaries.

Direct Exporting involves the company selling directly to a foreign buyer, often with the help of local distributors. This provides more control over pricing and distribution, but requires a deeper understanding of the foreign market. Indirect Exporting, on the other hand, uses third-party companies, such as export management firms, to handle international sales. This approach reduces the risk and complexity associated with market entry, though it offers less control.

Advantages of exporting include minimal investment and lower risk compared to other forms of international business. Exporting is also a flexible approach, allowing companies to test new markets with limited commitment. However, exporting comes with challenges, including logistical issues, tariffs, and a lack of direct market insight, which can hinder responsiveness to local customer needs.

Licensing

Licensing is a low-risk method where a domestic company (the licensor) grants a foreign company (the licensee) the rights to use its intellectual property, such as patents, trademarks, or technology, in exchange for royalties. Licensing allows the licensor to enter a foreign market without the need to invest heavily in physical infrastructure. This approach is particularly common in technology, pharmaceutical, and entertainment industries, where intellectual property is valuable.

For example, British American Tobacco Company (BATS) has given licenses in many countries for the manufacture of their brand of cigarettes “555”. In India, ITC is the licensed producer of “555”. A domestic company can license foreign firms to use the company’s technology or products and distribute the company’s product.

However, licensing can limit the licensor’s control over how the brand or technology is used, which can impact brand reputation if the licensee does not meet quality standards. Additionally, licensing can inadvertently create future competitors if the licensee becomes proficient in the licensed technology. Monitoring licenses and safeguarding the company’s Intellectual Property Rights can prove to be challenging in an international scenario.

Franchising

Franchising is a popular approach for businesses that rely heavily on brand identity and a standardized customer experience, such as in the fast-food, retail, and hospitality industries. In this model, the franchisor grants a franchisee the right to operate under its brand and business model. Franchising enables rapid expansion with relatively low capital investment since franchisees typically cover the costs of setting up and running the local business. This approach allows the franchisor to grow its brand presence globally while leveraging the local knowledge and investment of franchisees. McDonald’s, Domino’s, KFC use franchising model.

The main challenge of franchising is maintaining consistency across locations, as franchisors need to ensure that franchisees adhere to the brand’s standards. Additionally, franchisors face legal complexities in different markets and must protect their intellectual property to prevent imitation.

Joint Ventures

Joint ventures involve a collaborative effort between two or more companies, often from different countries, to create a new business entity. These partnerships are popular in industries requiring substantial investment, such as automotive, technology, and energy sectors. By forming a joint venture, companies can share both the financial risk and the expertise needed to operate in the foreign market. For example, Sony and Ericsson partnered to create Sony Ericsson, combining Ericsson’s telecommunications expertise with Sony’s consumer electronics know-how. This collaboration allowed both companies to benefit from shared resources and market knowledge.

However, joint ventures can be complex to manage due to differences in organizational culture, decision-making, and profit-sharing arrangements. Conflicts between partners can jeopardize the venture’s success, particularly if one partner’s priorities shift over time.

Foreign Direct Investment (FDI)

Foreign Direct Investment (FDI) involves a direct investment by a company in business assets, such as facilities, in a foreign country. FDI provides the investing company with significant control over operations and access to local markets. FDI can take the form of Greenfield Investments, where a company builds new facilities from scratch, or Mergers and Acquisitions, where it acquires or merges with an existing foreign company. Greenfield investments offer complete control and customization but require substantial investment and time to establish. Mergers and acquisitions allow faster market entry and access to established resources, though they can involve complex integration challenges.

While FDI offers the potential for high returns and market control, it also carries high costs and risks, including regulatory challenges, cultural differences, and potential political instability.

Strategic Alliances

Strategic alliances are partnerships between companies that aim to achieve shared goals without creating a separate legal entity. This form of collaboration is commonly used in technology and pharmaceutical industries, where companies combine resources and expertise to innovate and develop new products. An example of a strategic alliance is the collaboration between Apple and IBM to create business-focused mobile applications for Apple’s devices. Through this alliance, both companies benefited from shared expertise without the need for a formal merger.

Strategic alliances offer flexibility and access to complementary resources while minimizing financial risk. However, companies must carefully manage the relationship to prevent intellectual property leaks and overreliance on the partner’s performance.

Management Contracts:

A management contract is an agreement between two companies whereby one company provides managerial and technical assistance for which proper monetary compensation is given, either as a flat lump sum fee or a percentage on the sales or a share in the profits.

Contract Manufacturing:

Contract manufacturing is the strategy of identifying a manufacturing unit to produce items at a competitive price in any part of the world. For example, Nike is procuring its athletic footwear in a number of factories in South East Asia. Many international companies with their origin in European countries have selected manufacturing centers in India, China, and South East Asia. All the developed nations are becoming the end user of outsourced products and services of developing nations

Contract Marketing:

All the companies, which are strong in production, may not have equal marketing strengths. However, they may be comfortable dealing with marketing outlets around the world such as Amazon, TESCO, Wal-Mart, and Alibaba. Such manufacturing units enter into a marketing agreement and concentrate more on production at lower costs.

Whole Owned Subsidiary:

This option is viable if a company is willing to take all the risks of all the operations pertaining to its business in a foreign country. A subsidiary can be formed from scratch (greenfield investment) to manufacture and market its products and services in a foreign country. The parents have control through technology, manufacturing expertise, intellectual property rights, and brand name. This method is direct investment, which contributes to the optimization of resources in the host country, generating employment opportunities and enhancing the standard of living in the host country. A firm can also export its products or services to other countries from its subsidiaries.

Merger or Acquisition:

In this case, the company in the host country selects a foreign company merges itself with it or acquires it. The foreign company acquires the control of ownership. This mode of an entry gives a competitive edge over competitors. Such companies strengthen their international manufacturing facilities and marketing network. It saves a lot of time in construction, initial setup, and regulatory approvals and so on. At the same time, the acquiring company can use all the established brand names, distribution networks and so on of the acquired company.
But there are some disadvantages to this method: It is a complex task involving banks, lawyers, bureaucrats, and politicians. The host countries may impose restrictions on acquisitions. The labour problem is a big challenge to acquisitions particularly in developing countries where unemployment is a critical issue.

Strategic Investment:

Any firm can purchase a stake in a foreign company, whereby they are entitled to a share in the profits if any. The shareholding can be a minority stake and maybe without voting rights. Generally, the investing company does not participate in the management of the target company.

Take-overs:

This is a strategy whereby a company identifies a healthy unit with a strong brand name and network and brings it under the management of another unit in order to become a leader in the field and guarantee success. The takeover may be a “hostile take-over”. Well-known examples are the Hinduja brothers who took over Ashok Leyland. Unilever’s take-over of Brook Bond and Lipton enhanced its position as a leader in the tea industry in India.

Turnkey projects:

A turnkey project is a contract under which a company is fully involved from concept to completion. It covers right from supply of manpower, capital, and erection of plant, installation and commissioning up to the trial operation of a project. The turnkey project contractors either get a fixed fee or the cost plus profits are collected over a period of time. At completing of the contract the foreign client handles the ‘key’ of a plant that is ready for full operation. Generally, infrastructure projects like power plants, airports, refineries, railway lines, highways, and dams are undertaken on a turnkey basis. Bechtel, Hyundai, Mitsubishi, L&T, and Daewoo are turnkey contractors for international projects.

Conclusion

The various forms of international business reflect the diverse strategies companies use to engage in global markets, each with its own advantages and challenges. Understanding these forms is crucial for businesses aiming to expand their operations internationally.

Exporting and importing are among the simplest forms of international business, allowing companies to sell goods across borders. This approach offers a relatively low-risk entry into foreign markets and helps businesses gauge demand without significant investment. However, it can also expose companies to tariffs, transportation costs, and potential trade barriers. Licensing and franchising provide another effective way to enter international markets. By granting rights to foreign entities to produce or sell products, companies can expand their reach with minimal capital investment. While this strategy allows for rapid growth and local market expertise, it also risks diluting brand control and quality. Joint ventures and strategic alliances enable businesses to share resources, knowledge, and risks with local partners. This collaborative approach can enhance market penetration and operational efficiency, leveraging local insights. However, it requires careful partner selection and alignment of goals to avoid conflicts. Foreign direct investment (FDI) represents a more substantial commitment, where companies establish operations in foreign markets. This form allows for greater control over business activities and the potential for higher returns. Nevertheless, it comes with increased exposure to political and economic risks, as well as significant capital requirements. Multinational enterprises (MNEs) operate across multiple countries with a centralized management structure, allowing for coordinated strategies and economies of scale. This model can drive significant innovation and competitive advantage, but managing diverse operations can be complex and resource-intensive.

In conclusion, the forms of international business—exporting, licensing, joint ventures, foreign direct investment, and multinational operations—each offer unique pathways for global engagement. Companies must carefully evaluate their objectives, resources, and risk tolerance to choose the most suitable approach. By understanding these forms, businesses can develop effective strategies to navigate the complexities of international markets, fostering growth and sustainability in an increasingly interconnected world.

Introduction to International Business

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