INTERNATIONAL BUSINESS

Modes Of International Business Expansion

PRESENTATION BY:Vanshaj Kumar 027

LEARNING OBJECTIVES:
To explain the concept of expansion modes for International Business To examine strategic trade-offs in selecting expansion modes To discuss trade-related expansion modes To evaluate contractual expansion modes To elucidate investment modes of expansion To explicate strategy for selecting the expansion modes To elaborate the decision-making process for selecting the expansion modes

Introduction
Why firms engage in international business?
To expand their sales To obtain resources To diversify their sources of sales and supplies To minimize competitive risk

International Business: Operations and Influences

For expanding business in foreign countries:

A firm has to choose an appropriate expansion mode.

Expansion modes are specific forms of entering a foreign country:

To have international presence Achieve the firms strategic goals

A thorough conceptual understanding of various expansion mode alternatives is imperative for making inernationalization decisions.

While evaluating trade-offs a firm has to assess its ability and willingness to commit: Resources Risk perception Anticipated returns Desired extent of control & internalisation Flexibility

 Right selection of modes of expansion has significant operational and strategic implications on firms success in internalization. Marketing strategy and country segments also need to be contemplated while working out an expansion mode strategy.

Five Stages of internationalization

Domestic operation and marketing activities Infrequent exports Exports through independent representatives or agents Establishment of sales subsidiaries Foreign production and manufacturing

The Usual Pattern of Internationalization

Strategic Trade-offs in selecting International Business Expansion Modes:

A FIRM HAS TO CHOOSE FROM A VARIETY OF EXPANSION MODES DEPENDING UPON:

Ability and willingness to commit resources in the target country Magnitude of risk the firm is willing to take in its international expansion Types of return anticipated from overseas operations Extent of control to be exerted in the firms foreign operations Level of externalization of the firms resources including its intellectual prop. Desired flexibility of expansion modes

International Business expansion modes

Modes of international business expansion is an institutional mechanism by which a firm expands to its operation overseas. Modes are :

1. Trade related modes 2. Contractual modes 3. Investment modes

TRADE-RELATED MODES:

 EXPORTS: may be defined as manufacturing the goods in home country and shipping them for sales to other country. INDIRECT EXPORTS: when a firm sells its products through an export intermediary based in its home country & does not take care of export activity.
A firm may expand internationally through indirect exports using either of the following ways:
Selling to a foreign firm or a buying agent an the home country Exports through a merchant intermediary such as export house, trading house etc .

 Agents: agents do not take the title of the goods and operate on behalf of principal firms, rather than themselves on commission basis. Major types of export agents include: Importers buying agents Country controlled buying agents Buying Offices: Overseas firms make their permanent presence in the suppliers countries by way of establishing a permanent buying office.

 Merchant Intermediaries: Exports intermediaries that buy and sell goods for a profit & take title of goods & assume risks thereof. Merchant Exporter: collect produce from several manufacturers or producers & export directly in their own name. International trading Companies: are generally large companies that accumulate, transport, and distribute goods in various markets. Trading/Export houses: home country based firms involved in international trading activities. The State Trading corporation (STC) and Metals and Minerals trading Corporation (MMTC) are the Indias largest trading houses.

 Direct Exports: when a company makes its domestically produced products available in foreign markets without employing any market intermediary in the home country. Merchant Importers: is an overseas based trader who imports products and further sells them to wholesaler or retailer for profit. Distributors: the distributors in the target countries to purchase the goods and subsequently sell them either to a market intermediary or to ultimate customer.

PIGGYBACKING- complementary exports

A firm may expand its business in a foreign country by using the distribution network of another company . Under the piggybacking arrangement, the exporting firm is termed rider whereas the other firm with established distribution channel in the target country is carrier. In , piggybacking exports, the branding and market promotion arrangements may differ.

COUNTERTRADE
Countertrade is a generic term that refers to various forms of trade arrangements wherein the payment is in form of reciprocal commitments for other goods or services rather than an exclusive cash transaction. Countertrade mainly takes place because: Scarcity of hard currency with importing country Restrictive importing countrys foreign exchange regulations to conserve hard currency Balance of trade problems of importing countries Trade opportunity with restrictive market.

E-modes of business expansion

Use of information and communication technology has rapidly grown over the recent years of expanding business internationally. Hamaracd.com ,an Indian website offers more than 25,000 of the most popular as well as popular songs of saregamas collection.

Contractual modes

Contractual modes are often employed to make use of strategic strengths & resources of a foreign based partner company for international business expansion

Factors influencing choice of foreign partners for contractual alliances include:

Strategic strength of partner that can be translated into some business value Commitment to cooperative goals Mutual trustworthiness Experience of operating in multi-channel environment.

 International strategic alliance : when a firm agrees to cooperate with one or more than one firm overseas, to carry out a business activity wherein each one contributes its different capabilities and strengths to the alliance . Rapid growth in global strategic alliance among large and small firms around the world highlights of the significance of global strategic alliances.

PHILIPS GLOBAL STRATEGIC ALLIANCE

INDUSTRY Advanced telephone sys Compact disks Electronic credit cards Lighting & electronic components Minicomputer software Mobile Communications Personal Memory systems Semiconductors & microchips Video recorders Videotex software & systems PARTICIPATING COMPANIES AT&T Sony Compagnie des machine bull Matsushita Electronic devices ICL PLC Thomson / Siemens Control data Intel Grundig Enidata US Japan France Japan Hong Kong Britain France / west Germany US US West Germany Italy COUNTRY OF INCORPORATION

Advantages of international strategic alliance

The investment cost is shared The internationalizing firm gets access to tangible & intangible resources of the alliance partner There is reduction in individual risks while operating overseas The alliance partners often cooperate so as to make use of their specific individual strengths Strategic alliances often promotes cooperation among competitors for mutual benefit.

 INTERNATIONAL SUB-CONTRACTING arrangements may involve supply of inputs, such as raw materials, semi-finished goods, components and technical know-how to a local manufacturer in a foreign country.

Contract manufacturing has also been used as a strategic tool for economic development in number of countries ,such as Korea, Mexico, Thailand, China, etc.

Turnkey projects
Conceptually turnkey means handling over a project to the client , when its complete in all respect and is ready to use on turning the key . International turnkey projects include conceptualizing, designing, constructing, installing, & carrying out preliminary testing of facilities.

The major types of turnkey project include:

Build and transfer (BT) : the firm conceptualizes, designs, builds, carries out primary testing, and transfers the project to the owner. Build ,operate , and transfer (BOT): the internationalizing firm not only builds the project but also manages it for a contracted period before transferring it to the foreign owner. build, operate, own (BOO): the internationalizing firm is expected to buy the project once it has been built , which results in foreign direct investment after a certain time period.

INTERNATIONAL LEASING
A firm may expand its business by leasing out new and used equipment to a manufacturing firm in such countries. The ownership of the property retains with the leasing firm (i.e, lessor) throughout the lease period during which the foreign- based user (i.e., lessee) pays leasing fee. International Lease finance corporation (ILFC), headquartered in Los Angles, is the largest aircraft lessor by value that had an inventory of about 1000 aircrafts by 2008.

INTERNATIONAL LICENSING
A firm, makes its intangible assets, such as patents, trademarks and copyrights, technical know-how and skills available for foreign company for a fee termed as royalty. Licensing termed as powerful tool for international expansion with little financial commitment. Ex:- ARROW from America since 1851,follows licensing strategy to expand business.

Licensing
The property licensed may include:
Patents Trademarks Copyrights Technology Technical know-how Specific business skills

Process and Trade-mark licensing

Process Licensing: the license gets the right to manufacture, produce and market the product in the defined market area. Trade-mark Licensing: the licensee also gets the rights to use trademarks/trade-names, besides using the process know-how. For instance, the brand Pierre Cardin was considerable affected adversely consequent to its licensing about 800 brands.

CROSS - LICENSING
It is a form of licensing involving mutual exchange of intangible assets that may not involve a cash payment . Cross licensing is a mutual sharing of patents between two companies without exchange of licensing fee.

International Franchising
Franchising is a special form of licensing in which an internationalizing firm (franchisor) provides intangible assets , such as trademarks, process know-how etc., and methods of doing business in a prescribed manner in return of franchising fee. Franchising is a lowrisk low-cost business expansion mode.

Key Reasons for Franchising

Market Potential

Financial Gain

Saturated Domestic Markets

International franchising is beneficial as it:

Facilitates rapid country entry with low entry risk Requires low investment and overheads Avoids day-to-day hassles of business operations Makes use of local entrepreneurs as business partners and their skills

Limitations of cross-franchising
Restrictive host country regulations Problems in identifying and selecting right franchisees Franchisor gets franchising fee rather than sharing the profits Lack of direct control It adversely affects the brand equity if quality is lowered. Franchisor does not gain market Market knowledge.

INVESTMENT MODES

A firm shifts its manufacturing operations in foreign countries

To effectively respond to market competition. To take advantage of host country incentive To gain access to the host country resources to be used as inputs To shift manufacturing operation overseas To have manufacturing base in market proximity To minimize logistics cost

Overseas assembly or mixing

In international assembly a manufacturer exports components, parts or machinery in completely knocked down condition and assembles these parts at a site of foreign country. In the food and pharmaceuticals industry , the equivalent industry known as mixing where in the imported ingredients are used at the firms overseas facilities.

JOINT VENTURES
International Joint ventures offer equity investment opportunities in foreign countries with sharing resources & risks with partner firms The partner firms may be either one or more local companies in the target country or firms either from third country or home country. Based on equity stake JV may be of 3 types:
Majority (< 50% ownership) 50-50 % (equal ownership) Minority (> 50% ownership)

Major benefits of international JV

They provide access to countries where complete ownership is restricted. Access to complementary strengths of the partner firm besides capital They require less investment compared to complete ownership Higher returns compared to trade related & contractual modes of expansion Greater degree of control Reduce operating and political risks

Limitations of JOINT VENTURE

Shared control over overseas operations Risk of equity partner becoming a future competitor Management problems due to cultural differences Difference in goals Trade-secrets are often shared Lack of flexibility

CASE STUDY
Japanese consumer electronics company SONY corp. and Swedish telecom firm Ericsson merged to establish a 50-50 joint venture headquartered in London in 2001 so as to combine Ericssons technological leadership in telecommunication & Sonys global marketing strengths to make mobile phones . Both companies have stopped making their own mobile phones in 1995. Sony also introduced Walkman branded music phones. In first quarter of 2006 Sony was the 4th largest manufacturer of mobile phones in world.

WHOLLY OWNED SUBSIDIARIES

A firm expands internationally to have complete control over its overseas operations by the way of 100% ownership in the new entity. Wholly owned subsidiaries help internationalizing firm protect its technology and skills from external sharing.

Major benefits of wholly owned subsidiaries

The firm exerts complete control over its foreign operations The trade secrets, proprietary technology and other firm specific advantages (FSAs) retains within the company

Limitations of wholly owned subsidiaries:

They require commitment of large financial and other operational resources There are high investment, if also associated with high risk exposure Considerable international experience & exposure is required

Greenfield Operations
Creating production and marketing facilities on a firms own from scratch is termed as green-field operations.

Mergers and acquisition

Transfer of existing assets of a domestic firm to a foreign firm lead to mergers and acquisitions. Cross-border acquisitions involves transferring management control of assets and operation of a domestic company to foreign firm.

Acquisitions can be of following types:

Minority : when a foreign firm acquires 10% to 49% interest in a firms voting stock
Majority: when a foreign firm acquires 50% to 99% voting interest Full outright stake: when a foreign firm acquires 100% of voting stock

STRATEGY FOR SELECTING INTERNATIONAL BUSINESS EXPANSION MODE Basic rules for selecting business expansion modes: Nave rule: the management uses same expansion
mode for all foreign markets ignoring the heterogeneity of different foreign markets & expansion conditions.

Pragmatic rule: it looks for a workable entry mode, only if initial entry mode is not feasible. Strategy rule: helps maximize the profit contribution
over the strategic planning period subject to availability of resources, risks, and non-profit objectives.

Marketing Strategy and expansion modes

Sequential adoption of business expansion modes

BASED ON MARKET ASIA-PACIFIC DIVIDED INTO 5 SEGMENTS

Platform countries: the firm can use these countries as initial bases to gather intelligence & initiate first contacts. Emerging countries: firms build up their initial presence in countries by way of a representative office. Growth countries: companies often build a significant presence in these countries Maturing countries: the prime task here is to look for further market developments Established countries: growth prospects are much higher in these countries

Decision tree for selection of international business modes

Contd

A self explanatory decision tree serves as a useful tool for selecting an appropriate international business expansion mode

Thank you