INTERNATIONAL BUSINESS

UNIT-1
INTRODUCTION TO INTERNATIONAL BUSINESS
INTRODUCTION
The world is fast becoming a global village where there are no boundaries to stop free trade and
communication. Keeping pace with it, the way we do business has changed in an unprecedented
manner.
Companies engage in international business to expand sales, acquire resources, diversify sales
and supplies and minimize competitive risk. The competition, in the global marketplace, is at its
peak where all companies want to sell their goods to everyone, everywhere on the globe.
International business transactions have been growing rapidly because of technological
improvements and government policies.

DEFINITION
According to Harcourt Brace and Company, Orlando, Florida, “International business consists of
transactions that are devised and carried out across national borders to satisfy the objectives of
individuals and organisations”

MEANING
International business refers to an organisation that buys and sells goods and services across
two or more national boundaries, even if the management is located in a single country.
International Business conducts business transactions all over the world. These transactions
include the transfer of goods, services, technology, managerial knowledge, and capital to other
countries.
International Business is also known, called or referred as a Global Business or an International
Marketing.
Thus, international business is the process of focusing on the resources of the globe and
objectives of the organisation on global business opportunities and threats.

EVOLUTION OF INTERNATIONAL BUSINESS

The business across the borders of the countries had been carried on since times immemorial.
But the business had been limited to the international trade until the recent past. The past-
world war II period witnessed an unexpected expansion of the national companies into
international or multi-national companies. The post 1990s period has given great fillip to
international business
In fact, the term international business was not in existence before two decades. The term
international business has emerged from the term ‘international marketing’, which in turn,
emerged from the term export marketing.
INTERNATIONAL TRADE TO INTERNATIONAL MARKETING
Originally, the producers used to export their products to the nearby countries and gradually
extended the exports to far off countries. Gradually, the companies extended the operations
beyond trade
E.g.: India used to export raw cotton, raw jute and iron ore during the early 1900s. the massive
industrialisation in the country enabled us to export jute products, cotton garments and steel
during 1960s
India, during 1980s could create market for its products, in addition to mere exporting. The
export marketing efforts include creation of demand for Indian products like textiles,
electronics, leather products, tea, coffee etc., arranging for appropriate distribution channels,
attractive package, product development, pricing etc. This process is true not only with India,
but also with almost all developed and developing economies
INTERNATIONAL MARKETING TO INTERNATIONAL BUSINESS
The multinational companies which were producing the products in their home countries and
marketing them in various foreign countries before 1980s, started locating their plants and
manufacturing facilities in foreign/host countries. Later, they started producing in one foreign
country and marketing in other foreign countries.
E.g.: Uni Lever established its subsidiary company in India, i.e., Hindustan lever limited (HLL).
HLL produces its products in Indian and markets them to Bangladesh, Sri Lanka, Nepal etc.
Thus, the scope of the international trade is expanded into international marketing and
international marketing is expanded into international business.

NATURE OF INTERNATIONAL BUSINESS

The nature of international business can be summarized as follows:
1) ACCURATE INFORMATION
International business conducts business transactions all over the world. These transactions
include the transfer of goods, services, technology, managerial knowledge and capital to other
countries. Gathering accurate information is important to complete all those transactions. The
accurate information includes the technology changes, implementation of various modern and
latest technologies, changes of taste and preferences, availability of natural resources, trends of
managerial knowledge and implications and capital investment etc.
Example: Europe was the most opportunistic market for leather goods and particularly for
shoes. Bata is functioning all over the world with clients and global leaders to enhance the
process of shipment. To attain this, looked to analyse present shipment systems utilizing their
clients as well as data from other organisations. Pursuing these enhancements to shipment
systems was a tremendous development area for Toyota, since they were able to improve their
client base and the needs of present clients. The usage of management information systems and
networking were critical to aiding the company to attain success in enhancing its shipment
systems.
2) INFORMATION NOT ONLY ACCURATE BUT SHOULD BE TIMELY
International business houses need not only have accurate but timely information as well.
Example: Coco-Cola could enter the European market based on the timely information, whereas
Pepsi entered later. Another example is the timely entrance of Indian software companies into
the US market compared to those of other countries. Indian software companies also made
timely decision in the case of Europe.
3) LARGE SCALE OPERATIONS
The size of the international business should be large. In international business, all the
operations are conducted on a massive scale to supply goods into all remote areas of the world
within a very short period of time. Production activities are conducted on a large scale to fulfil
the requirements of maximum portion of the world. It first sells its goods in the local market.
Then the surplus goods are exported.
Example: Samsung is the world’s largest manufacturer of mobile phones and smart phones
fuelled by the popularity of its Samsung galaxy line of devices.
The number one mobile manufacturer in the world is Samsung. The company sold 107.5 million
smart phones during second quarter vis-à-vis 90.4 million mobiles during the same quarter in
2012. The company’s global market share in the mobile share in the mobile market too went up
to 24.7% from 21.5% in the previous year.
4) MARKET SEGMENTATION BASED OF GEOGRAPHICAL SEGEMENTATION
Market segmentation is the process in marketing of dividing a market into distinct segments
that behave in the same way or have similar needs. While an international marketer may
identify many possible segments in the target markets, these need to be evaluated for viability
and business potential.
Example: McDonalds has segmented their products according to bases of demographic,
psychographic and behavioural. They segmented their products and positioned their products
according to kids, students and family.
McDonalds offers different products like happy meal which includes free toys for kids. For
families it has made different outlets and meals which are suitable for takeaways and drive-
thru. McDonalds has made its environment which is suitable for students to hang out with their
friends and can get their lunch at McDonalds.
5) INTERNATIONAL MARKETS HAVE MORE POTENTIAL THAN DOMESTIC MARKETS
International markets present more potentials than the domestic markets. This is due to the fact
that international markets are wide in scope, varied in consumer tastes, preferences and
purchasing abilities, size of the population etc.
Example: The IBMs sales are more in foreign countries than in USA. Similarly, Coca-Cola’s sales
are more in foreign countries than in their respective home country
6) INTERNATIONAL BUSINESS FACILITATES FOR INTEGRATION OF ECONOMIES
International business integrates the economies of many countries. This is because it uses
finance from one country, labour from another country and infrastructure from another
country. It designs the product in one country, produces its parts in many different countries
and assembles the product in another country. It sells the product in many countries, i.e. in the
international market.
Example: A world leader in consumer lifestyle, healthcare and lighting industries, Philips
integrates technologies and design into people centric solutions, based on fundamental
customer insights and the brand promise of “sense and simplicity”. With 50000 products, 1800
logos, a website present in 57 countries and translated in 35+ target languages and 500
consumer marketing managers in the consumer lifestyle sector.
7) INTERNATIONAL BUSINESS GENERATES ENTHUSIASTIC COMPETITION
International business generates enthusiastic competition among similar types of organisations
all over the world. The competition is between unequal partners i.e. developed and developing
countries. In this keen competition, developed countries and their MNC’s are in a favourable
position because they produce superior quality goods and services at very low prices.
Developed countries also have many contacts in the world market. So, developing countries find
it very difficult to face competition from developed countries.
8) INTERNATIONAL BUSINESS GIVES A LOT OF IMPORATNCE TO SCIENCE AND
TECHNOLOGY
Science and technology help the business to have large scale production. Developed countries
use high technologies. Therefore, they dominate global business. International business helps
them to transfer such top high-end technologies to the developing countries.

FEATURES OF INTERNATIONAL BUSINESS

1) BENEFITS TO PARTICIPATING COUNTRIES
International business gives benefits to all participating countries. However, the developed
(rich) countries get the maximum benefits. The developing (poor) countries also get benefits.
They get foreign capital and technology. They get rapid industrial development. They get more
employment opportunities. All this results in economic development of the developing
countries. Therefore, developing countries open up their economies through liberal economic
policies.
2) DOMINATED BY DEVELOPED COUNTRIES AND MNCS
International business is dominated by developed countries and their multinational
corporations (MNCs). At present, MNCs from USA, Europe and Japan dominate (fully control)
foreign trade. This is because they have large financial and other resources. They also have the
best technology and research and development (R & D). They have highly skilled employees and
managers because they give very high salaries and other benefits. Therefore, they produce good
quality goods and services at low prices. This helps them to capture and dominate the world
market.
3) DIFFERENT NATIONAL POLICIES AND GOVERNMENT INTERVENTION
Economic and political policies differ from one country to another. Policies pertaining to trade,
commerce, export and import, taxation, etc., also differ widely among countries though they are
more or less uniform within the country. Tariff policy, import quota system, subsidies and other
controls adopted by governments interfere with the course of normal trade between one
country and another.
4) HETEROGENOUS MARKETS
A cross border business is very different from one that involves a single country. The
international markets lack homogeneity on account of differences in climate, language,
preferences, habit, customs, weights and measure, etc. The behaviour of international buyers in
each case would, therefore, be different. International trade takes place between differently
cohered groups. The socio-economic environment differs greatly among different nations.
5) IMMOBILITY OF FACTORS
The degree of immobility of factors like labour and capital is generally greater between
countries than within a country due to the immigration laws, citizenship, qualifications, etc.
these restrictions slows down the international mobility of labour. Similarly, the international
capital flows are prohibited or severely limited by different governments having different fiscal
policies.
6) INTERGRATION OF ECONOMIES
International business integrates (combines) the economies of many countries. This is because
it uses finance from one country, labour from another country, and infrastructure from another
country. It designs the product in one country, produces its parts in many different countries
and assembles the product in another country. It sells the product in many countries, i.e. in the
international market.
7) INTERNATIONAL RESTRICTIONS
International business faces many restrictions on the inflow and outflow of capital, technology
and goods. Many governments do not allow international businesses to enter their countries.
They have many trade blocks, tariff barriers, foreign exchange restrictions, etc. All this is
harmful to international business.
8) KEEN COMPETITION
International business has to face keen (too much) competition in the world market. The
competition is between unequal partners i.e. developed and developing countries. In this keen
competition, developed countries and their MNCs are in a favourable position because they
produce superior quality goods and services at very low prices. Developed countries also have
many contacts in the world market. So, developing countries find it very difficult to face
competition from developed countries
9) LARGE SCALE OPERATIONS
In international business, all the operations are conducted on a very huge scale. Production and
marketing activities are conducted on a large scale. It first sells its goods in the local market.
Then the surplus goods are exported.
10) SPECIAL ROLE OF SCIENCE AND TECHNOLOGY
International business gives a lot of importance to science and technology. Science and
Technology (S & T) help the business to have large-scale production. Developed countries use
high technologies. Therefore, they dominate global business. International business helps them
to transfer such top high-end technologies to the developing countries.
11) SENSITIVE NATURE
The international business is very sensitive in nature. Any changes in the economic policies,
technology, political environment, etc. has a huge impact on it. Therefore, international business
must conduct marketing research to find out and study these changes. They must adjust their
business activities and adapt accordingly to survive changes.
REASONS FOR ENTERING INTERNATIONAL MARKET
1) TO ACHIEVE HIGHER RATE OF PROFITS
When the domestic markets do not promise a higher rate of profits, business firms search for
foreign markets which promise for higher rate of profits
Hewlett Packard earned 85.4% of its profits from the foreign markets compared to that of
domestic markets in 1994. Apple earned 390 million as net profit from the foreign markets and
only 310 million as net profit from its domestic market 1994.
2) EXPANDING THE PRODUCTION CAPACITIES BEYOND THE DEMAND OF THE DOMESTIC
COUNTRY
Some of the domestic companies expanded their production capacities more than the demand
for the product in the domestic countries. These companies, in such cases, are focused to sell
their excess production in foreign developed countries.
Toyota of japan is an example
3) SEVERE COMPETITION IN THE HOME COUNTRY
The countries oriented towards market economies since 1960s had severe competition from
other business firms in the home countries. The weak companies which could not meet the
competition of the strong companies in the domestic country started entering the markets of
the developing countries.
4) LIMITED HOME MARKET
When the size of the home market is limited either due to the smaller size of the population or
due to lower purchasing power of the people or both, the companies internationalise their
operations
Most of the Japanese automobile and electronic firms entered US, Europe and even African
markets due to smaller size of the home market. ITC entered the European market due to the
lower purchasing power of the Indians with regard to high quality cigarettes.
5) POLITICAL STABILITY vs POLITICAL INSTABILITY
Political stability does not simply mean that continuation of the same party in power, but it does
mean that continuation of the same policies of the government for a quite longer period.
It is viewed that USA, UK, France, Germany is a politically stable country. Most of the Asian
countries like Malaysia, Indonesia, Pakistan and India are politically instable countries.
Business firms prefer to enter the politically stable countries and are restrained from locating
their business operations in politically instable countries. In fact, business firms shift their
operations from politically instable countries into politically stable countries.
6) AVAILABILITY OF TECHNOLOGY AND MANAGERIAL COMPETENCE
Availability of advanced technology and managerial competence in some countries act as pulling
factors for business firms from the home country. Companies from the developing world are
attracted by the developed countries due to these reasons. In fact, American companies, in
recent years, depend on Japanese companies for technology and managerial expertise.
7) HIGH COST OF TRANSPORTATION
Initially companies enter foreign countries through the marketing operations. At this stage, the
companies realize the challenge from the domestic companies. Added to this, the home
companies enjoy higher profit margins whereas the foreign firms suffer from lower profit
margins. The major factor for this situation is the cost of transportation of the products.
Under such conditions, the foreign companies are inclined to increase their profits margin by
locating their manufacturing facilities in foreign countries where there is enough demand either
in one country or in a group of neighbouring countries.
8) NEARNESS TO RAW MATERIALS
The source of highly qualitative raw materials and bulk raw materials is a major factor for
attracting the companies from various foreign countries. Most of the US based and European
based companies located their manufacturing facilities in Saudi Arabia, Qatar, Iran, Oman and
other middle east countries due to the availability of petroleum. These companies, thus, reduced
the cost of transportation.
9) AVAILABILITY OD QUALITY HUMAN RESOURCE AT LESS COST
This is the major factor, in recent times, for software, high technology and telecommunication
companies to locate their operations in India. India is a major source for high quality and low-
cost human resources unlike USA, developed European countries and Japan. Importing human
resource from India by these firms is costly rather than locating their operations in India. Hence
these companies started their operations in India and other similar countries.
10) LIBERALISATION AND GLOBALISATION
Most of the countries in the global liberalised their economies and opened their countries to the
rest of the globe. These changed policies attracted the multinational companies to extend their
operations to these countries.
11) TO INCREASE MARKET SHARE
Some of the large-scale business firms would like to enhanced their market share in the global
market by expanding and intensifying their operations in various foreign countries. Companies
that expand internally tend to be ‘oligopolistic’. Smaller companies expand internationally for
survival while the larger companies expand to increase the market share.
12) TO AVOID TARIFFS AND IMPORT QUOTAS
It was quite common before globalisation that governments-imposed tariffs or duty on imports
to protect the domestic company. Sometimes government also fixes import quotas in order to
reduce the competition to the domestic companies from the competent foreign companies.
These practices are prevalent not only in developing countries but also in advanced countries.
Japanese companies are competent competitors to the US companies. USA imposed tariffs and
quotas regarding import of automobiles and electronics from Japan. Harley Davidson of USA
sought and got 5 years of tariff protection from Japanese imports. Similarly, japan places high
tariffs on imports of rice and other agricultural goods from USA.
STAGES OF INTERNALISATION
The internalisation process generally includes five stages
STAGE 1
DOMESTIC COMPANY
Domestic company limits its operations, missions and vision to the national political
boundaries. These companies focus its view on the domestic market opportunities, domestic
suppliers, domestic financial companies, domestic customers etc.
These companies analyse the national environment of the country, formulate the strategies to
exploit the opportunities offered by the environment. The domestic companies’ unconscious
motto is that, “if it is not happening in the home country, it is not happening”.
The domestic company never thinks of growing globally. If it grows, beyond its present capacity,
the company selects the diversification strategy of entering into new domestic markets, new
products, technology etc. The domestic company does not select the strategy of
expansion/penetrating into the international markets.
STAGE 2
INTERNATIONAL COMPANY
Some of the companies which grow beyond their production or domestic marketing capacities,
think of internationalizing their operations. Those companies who decide to exploit the
opportunities outside the domestic country are the stage two companies. These companies
remain ethnocentric or domestic country oriented. These companies believe that the practices
adopted in domestic business, the people and products of domestic business, the people and
products of domestic comp
any are superior to those of other countries. The Focuses of these companies is domestic but
extends the wings to the foreign countries.
These companies select strategy of locating the branch in the foreign markets and extend the
same domestic operations into foreign markets. In other words, these companies extend the
domestic product, domestic price, promotion and other business practices to the foreign
markets.
Normally internationalisation process of most of the global companies starts with this stage two
process. Most of the companies follow this strategy due to limited resources gradually before
becoming a global company without much risk.
The International company holds the marketing mix constantly and extends the operations to
new countries. Thus, the international company extends the domestic country marketing mix
and business model and practices to foreign countries.
STAGE 3
MULTINATIONAL COMPANY
Sooner or later, the international companies learn that the extension strategy (that is extending
the domestic product, price and promotion to foreign markets) will not work.
The best example is that Toyota exported Toyopet cars produced for Japan in Japan to USA in
1957. Toyopet was no successful in USA. Toyota could not sell these cars in USA as they were
overpriced, underpowered and build like tanks. Thus, these cars were not suitable for US
markets. The unsold cars shipped back to Japan.
Toyota too this failure as a rich learning experience and as a source of invaluable intelligence
but not as failure. Toyota, based on this experience designed new models of cars suitable for the
USA market. The international companies turn into multinational companies when they start
responding to the specific needs of the different country markets regarding product, price and
promotion.
This stage of multinational company is also referred to as multi-domestic. Multi-domestic
company formulates different strategies for different markets, thus, the orientation shifts from
ethnocentric to polycentric. Under polycentric orientation the offices/branches/subsidiaries of
a multinational company work like domestic company in each country where they operate with
distant policies and strategies suitable to the country concerned. Thus, they operate like a
domestic company of the country concerned in each of their markets.
Philips of Netherlands was a multidomestic company of this stage during 1960s. It used to have
autonomous national organisations and formulate the strategies separately for each country. Its
strategy did work effectively until the Japanese companies and Matsushita started competing
with this company based on global strategy. Global strategy was based on focusing the company
resources to serve the world market.
Philips strategy was to work like a domestic company, and produce a number of models of the
product. Consequently, it increased the cost of production and price of the product. But the
Matsushita’s strategy was to give the value, quality, design and low price to the customer.
Philips lost its market share as Matsushita offered more value to the customer.
Consequently, Philips changed its strategy and created “industry main groups” in Netherland
which are responsible for formulating a global strategy for producing, marketing and R and D.
STAGE 4
GLOBAL COMPANY
A global company is the one, which has either global marketing strategy or a global strategy.
Global company either produces in home country and focuses on marketing these products
globally, or produces the products globally and focuses on marketing these products
domestically.
Harley designs and produces super heavy weight motor cycles in USA and markets in the global
market. Similarly, Dr. Reddy’s Lab designs and produces drugs in India and markets globally.
Thus, Harley and Dr. Reddy’s lab are examples of global marketing focus. Gap procures products
in the global countries and market the products in its retail organisation in USA. Thus, gap is an
example for global sourcing company.
Harley Davidson designs and produces in USA and gains competitive advantage as Mercedes in
Germany. The gap understands the US consumer and got competitive advantage.
STAGE 5
TRANSNATIONAL COMPANY
Transnational company products, markets, invests and operates across the world. It is an
integrated global enterprise that links global markets at profit. There is no pure transnational
corporation. However, most of the transnational companies satisfy many of the characteristics
of a global corporation.
A transnational company is geocentric in its orientation. This company thinks globally and acts
loyally. This company adopts global strategy but allows value addition to the customer of a
domestic country. This company allows adaptation to add value to its global offer.
For example, Coca-Cola, Pepsi-Cola, etc.

DIFFERENCE BETWEEN DOMESTIC AND INTERNATIONAL BUSINESS

SL.NO BASIS FOR DOMESTIC BUSINESS INTERNATIONAL BUSINESS
COMPARISON

1 MEANING A business is said to be domestic, International business is one which

when its economic transactions are is engaged in economic transaction
conducted within the geographical with several countries in the world.
boundaries of the country.

2 AREA OF Within the country Whole world

OPERATION

3 BUSINESS It can be conducted easily. It is difficult to conduct research.

RESEARCH

4 CAPITAL Less Huge

INVESTMENT

5 CURRENCY Mostly depends on local currency It depends on foreign currencies for

for transactions. transactions.

6 COST Cost Advantage by automation, High Volume cost advantage.

ADVANTAGE new methods etc.

7 CULTURE
There is less difference in the
market culture of local areas and
regions within a country. The
market culture is relatively
uniform
The market culture widely varies
among different nations and
regions.

8 DEALS IN Single currency Multiple currencies

9 ENVIRONMENT A domestic business is only Domestic, foreign and international

affected by the variables in the environment factors affect an
domestic environment international business

10 HUMAN A domestic business can succeed Multi lingual, multi strategic and
RESOURCE with human resource with multi-cultural human resource is
minimum skill and knowledge necessary for smooth operations of
an international business

11 MOBILITY OF Free Restricted

FACTORS OF
PRODUCTION
 12 NATURE OF Homogeneous Heterogeneous
CUSTOMERS

13 PROMOTION Domestic marketing and Marketing and advertising

advertising strategies are used strategies vary from country to
country due to language barriers

14 PRICING Same price is charged for similar Price differentiation is carried out
products

15 QUALITY Quite low Very high

STANDARDS

16 RESTRICTIONS Few Many

17 SALE Selling Procedures remain Conduct and selling procedure

PROCEDURE unaltered changes

18 TRANSACTION Short Distances, quick business is Long Distances and hence more
TIME possible. transaction time.

19 WORKING No such changes are necessary Working environment and

ENVIRONMENT management practices change to
suit local conditions.

MODES OF ENTERING INTERNATIONAL BUSINESS

Modes of entry into an international market are the channels which your organization employs
to gain entry to a new international market.

EXPORTING

LICENSING

FRANCHISING Contract
manufacturing

SPECIAL MODES Management contracts

FDI WITH Turnkey projects

ALLIANCES
FDI WITHOUT
ALLIANCES
When businesses grow successfully within their domestic markets, they attempt to expand their
businesses into international markets, in an attempt to replicate its success in overseas markets.
The long-term advantages of doing international business in a particular country depend upon
the following factors −
 Size of the market demographically
 The purchasing power of the consumers in that market
 Nature of competition
By considering the above-mentioned factors, firms can rank countries in terms of their
attractiveness and profitability. The timing of entry into a nation is a very important factor. If a
firm enters the market ahead of other firms, it may quickly develop a strong customer base for
its products.

1. EXPORTING
Exporting is a typically the easiest way to enter an international market, and therefore most
firms begin their international expansion using this model of entry. Exporting is the sale of
products and services in foreign countries that are sourced from the home country.
An example of export is rice being shipped from China to be sold in many countries.
ADVANTAGES
1. You could significantly expand your markets, leaving you less dependent on any single one.
2. Greater production can lead to larger economies of scale and better margins.
3. Your research and development budget could work harder as you can change existing
products to suit new markets.
DISADVANTAGES
1. Unless you're careful, you can lose focus on your home markets and existing customers.
2. Your administration costs may rise as you may have to deal with export regulations when
trading outside the European Union.
3. You will be managing more remote relationships, sometimes thousands of miles away.
4. In overseas markets, you may lose some of the control that you are used to at home.
5. You will need to think of your new market differently to the home market. They will be
different customers with their own reasons for buying your products.

2. LICENSING
In this mode of entry, the domestic manufacturer leases the right to use its intellectual property
(i.e.) 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 licensor has minimum involvement in day to day functions. Therefore, the returns are
comparatively low. Licensing specifies the territory as well as period. The licensor gives such
permission after establishing a commendable position globally.
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”.
Pepsi cola licensed to Heineken of the Netherlands giving them the exclusive right to produce
and sell Pepsi cola in Netherlands.
ADVANTAGES
1. 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.
DISADVANTAGES
1. 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 them 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.
3. FRANCHISING
Under franchising an independent organization called the franchisee operates the business
under the name of another company called the franchisor. Under this agreement the franchisee
pays a fee to the franchisor.
It is a form of licensing wherein the franchisor exercises more control over franchisee.
The franchisor provides the following services to the franchisee.
1. Trade marks
2. Operating System
3. Product reputation
4. Continuous support system like advertising, employee training, reservation services quality
assurances program etc.
All the investment on premises, HR operations and promotions are totally borne by the
franchisees. In practice the franchiser is determined to maintain a standard throughout the
world in terms of quality brand logo and symbol. But the product is adaptable depending on the
socio-cultural background of the country. McDonalds sells beef in Russia and vegetarian burgers
in India. Sometimes the franchisors initiate the process where the economy is in a boom stage.
In many developed nations, franchisees initiate the process and they are forced to bear all the
expenses.
Example: McDonalds, Domino’s pizza and KFC are the known franchise brands.
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 reduce the market opportunities for both
4. Both the parties have the responsibilities to maintain product quality
and product promotion.
4. There is a problem of leakage of trade secrets.

4. SPECIAL MODES
a) CONTRACT MANUFACTURING
Contract manufacturing in international markets is used in situations when one company
arranges for another company in a different country to manufacture its products; this is also
known as international subcontracting or international outsourcing. The company provides the
manufacturer with all the specifications, and, if applicable, also with the materials required for
the production process.
Many companies outsource their production and concentrate mainly on marketing operations.
Contract manufacturing is the strategy of identifying a manufacturing unit to produce items at a
competitive price in any part of the world.
Contract manufacturing with a dimension in the service sector offers ample opportunities for
Indian companies in the form of Business (BPO) and Knowledge Process Outsourcing (KPO). All
developed nations are becoming end users of outsourced products and services of developing
nations.
Example: Nike is procuring its athletic footwear in a number of factories in South East Asia.
hundreds of international companies with their origin in European countries have selected
manufacturing centres in India, China and South East Asia.
H & M, Target, J.C. penny have contract manufacturing arrangements in many parts of the world.
ADVANTAGES
1. Less investment
2. Less risky
3. Low cost
4. Better capacity utilization
5. An opportunity for local producers to become international
DISADVANTAGES
1. Deviations from Product design and quality Specifications
2. Loses control over Manufacturing Process
3. No authority to sell output

b) MANAGEMENT CONTRACT
A management contracts is an agreement between two companies whereby one company
provides managerial assistance, technical expertise and specialised services to the second
company of the agreement for a certain agreed period in return for the monetary compensation.
ADVANTAGES
1. Saves time and resources
2. Provides expertise
3. Saves money
4. Provides business continuity
DISADVANTAGES
1. Loss of control
2. Reputation damage
3. Conflict of interest

c) 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 project.
Bechtel, Brown Bovary, Hyundai. L&T are turnkey contractors for international projects.
They use term like BOT (build, operate, transfer) and BOOT (build, own, operate and transfer)
depending upon the level of involvement and obligations. Whenever a turnkey project
contractor is capable of cutting costs on material and manpower or finances or speed of
completion, every component increases profitability.
ADVANTAGES
1. Less management works
2. Reduced project timelines
3. Reduced cost overruns
DISADVANTAGES
1. Limited client involvement
2. Budgets may be higher than necessary

5. FDI WITH ALLIANCE

Innovations, creations, productivity, growth, expansions and diversifications in recent years are
mostly accomplished by strategic alliances adopted by various companies like mergers and
acquisitions and joint ventures.
Strategic alliance is a co-operative and collaborative approach to achieve the larger goals.
Strategic alliance takes different forms like licensing, franchising, contract manufacturing, joint
ventures etc.
a) MERGERS & ACQUISITIONS
A domestic company selects a foreign company and merges 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.
Example:
MERGER - TATA MOTORS-JAGUAR LAND ROVER: Tata Motors Limited (TELCO), is an Indian
multinational automotive manufacturing company headquartered in Mumbai, India and a
subsidiary of the Tata Group and the Jaguar Land Rover Automotive PLC is a British
multinational automotive company headquarters in Whitley, Coventry, United Kingdom, and
now a subsidiary of Indian automaker Tata Motors. Tata Motors acquisition of luxury car maker
Jaguar Land Rover was for the price of $2.3 billion. This could probably the most ambitious deal
after the Ranbaxy won. It certainly landed Tata Motors in a lot of troubles.
ACQUISITION - The global industrialist L.N. Mittal was successful right from the first acquisition
of a steel mill in Indonesia. Recently, Walmart’s acquisition of Flipkart has strengthened its
service synergy in the international market.
ADVANTAGES
1. The company immediately gets the ownership and control over the acquired firm’s factories,
employee, technology, brand name and distribution networks.
2. The company can formulate international strategy and generate more revenues.
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, lawyer’s 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. Labour problem of the host country’s companies are also transferred to the acquired
company.
b) 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.
Example: The Taj group of hotels has a joint venture in Russia for setting up Five start hotels.
Mahindra and Mahindra has recently entered into a joint venture with Renault to manufacture
cars.
ADVANTAGES
1. Joint venture provide 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. Its 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.

6. FDI WITHOUT ALLIANCES

Companies enter the international market through FDI, invest their money, establish their
manufacturing and marketing facilities through ownership and control.
Foreign direct investment refers to the process whereby residents of one country (the home
country) acquire ownership of assets for the purpose of controlling the production, distribution
and other activities of a firm in another country (the host country)
GREENFIELD STRATEGY:
The term green field refers to starting with a virgin green site and then building on it. Thus,
green field strategy is starting of the operations of a company from scratch in a foreign market.
The company conducts the market survey, selects the location, buys land, creates the new
facilities, erects the machinery, remits or transfer the human resources and the operations and
marketing activities.
 Example: A number of south American countries like Argentina and few South East Asian
nations like Indonesia fell prey to the dominant forces of overseas investors. They feel that the
old colonialism many re-emerge through investments. However, China, Taiwan, India, Brazil,
Argentina and other developing countries have started attracting huge foreign investments.

DIFFERENCE BETWEEN VARIOUS MODES OF ENTRY

BASIS EXPORTING LICENSING FRANCHISING SPECIAL FDI WITH FDI WITHOUT
MODES ALLIANCE ALLIANCE
GOVERNED Foreign Contract law, Company law, Foreign Indian Contract law,
BY exchange 1872 1872 or exchange companies act 1872
management franchising management 2013
act 1999 regulations, act 1999
2004 as the
case may be

REGISTRATI It is necessary Not necessary Mandatory Mandatory Compulsory Not always

ON to get registration
registered
with the
DGFT
(Director
General of
Foreign
Trade),
Ministry of
Commerce,
Government
of India
TRAINING Not needed Not provided provided Not provided Not related Not related
AND
SUPPORT

PROCESS Acquire Involves one- Needs ongoing Needs ongoing Work May not realize
knowledge time transfer assistance of assistance together and experience curve
about local of property or franchiser. assist each
market rights. other

FEE Low financial Negotiable Standard Lower cost Assumes all Shared cost
STRUCTURE exposure (Royalty) Management strategies
Fees

DEGREE OF Potential The licensor Franchisor Considerable Depends om Complete control

CONTROL conflicts with has control on exerts control the type of
distributors the use of considerable alliance
and logistical intellectual control over
complexities property by franchisee's
the licensee, business and
but has no process.
control on the
licensee's
business.
FINANCIAL low low low high high high
RISK