Management > International Business Management > Introduction to International Business > Forms of International Business
The different forms of international business are as follows
Export:
Export deals with the physical movement of goods and services from one place to another through a customs port followings the rules of both the country of origin and country of destination. This method remains the most common means of entry into international markets. An export strategy is a very attractive option that is merely an extension of domestic operations. It also minimizes the risk component as well as the capital requirement. The host company’s involvement in the international market is limited to identifying customers for marketing its products. In
recent days, due to better technology, communication, and transport, exporting has become easier. Nowadays, the majority of companies adopt the philosophy of multi-product, multi-location, multi-strategic, and multi-dimensional operations.
Exporters can be classified in several ways:
- Depending upon the size of business, they are classified as small and large exporters.
- Depending upon the product lines exported, they are classified as single product and multiple product line exporters.
- Depending upon the destination of their exports, they are classified as single destinations or multi destination exporters.
- Depending upon the frequency of their exports, they are classified as occasional exporters
Licensing:
A licensing is an agreement whereby a licensor grants the rights to intangible property (patents, inventions, formulas, processes, designs, copyrights, and trademarks) to another entity (licensee) for a specified period and in return, the licensor receives a royalty/fee from the licensee. Licensing specifies the territory as well as period. The licensor gives such permission after establishing such a command-able position globally. 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. By licensing, the domestic company need not bear any costs and risks of entering foreign markets on its own, yet it is able to generate income from royalties. The returns to licensor are comparatively low. The drawback of this arrangement is the risk of providing valuable technological knowledge to foreign companies and thereby losing some degree of control over its use. Monitoring licenses and safeguarding the company’s Intellectual Property Rights can prove to be challenging in an international scenario.
Franchising:
Franchising is basically a specialized form of licensing in which the franchiser not only sells the intangible property to the franchisee but also insists that the franchisee agrees to abide by strict rules as to how it does business. The franchiser supplies the main part of the product and provides the following services to the franchisee: trade Marks, Operating Systems, Product and Brand Name. Company support systems like advertising, training of employees, quality assurance are also involved in franchising Licensing works well for manufacturing companies but franchising is a better option for international expansion efforts of service or retailing companies. Franchising has the same advantages as licensing. The franchisee bears almost all the costs and risks in establishing foreign operations. The franchiser’s contribution is limited to providing the concept, technology and training the franchisee in the already established model. Maintaining quality poses the biggest challenge to the franchiser. McDonald’s, Domino’s, KFC use franchising model.
Joint venture:
A joint venture is a binding contract between two venture partners to set up a project either in the home country or host country or a third country. In this case, both parties are committed to joint risk-taking and joint profit sharing. This is a very popular mode of entry into foreign markets, as it minimizes business risk and investment. It is owned by one or more firms in proportion to their investment. For the success of a joint venture, it is absolutely necessary for the venture partners to understand all the aspects of management, investment, and regulations of the countries where they operate. The business units should have clear guidelines and operation manuals wherein the role of everyone should be clearly defined.
Strategic alliances:
A strategic international alliance is a business relationship established by two or more companies to cooperate out of mutual need and to share risk in achieving a common objective. Thus if a joint venture is done with an existing competitor, it could be termed as a strategic alliance. Sony Ericsson is an example of a joint venture between Sony, a Japanese company and Ericsson, a Swedish company.
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.
Foreign Direct Investment (FDI):
The flow of funds from one destination to another is called investment. Companies, which are constantly involved in international business, invest their money in manufacturing and marketing bases through ownership and control. FDI is an investment made by a company in a foreign country to start its operations. Various options available for an FDI are as follows. Developing countries are formulating strategies by offering ample amount of incentives to attract FDI.
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.
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