International business can take different forms. The choice of form is very important. The desire to be close the market, the need for ‘do it yourself’, tariff barriers, risk diversification and increased potential to reach other neighbouring markets in due course will make a firm choose ownership forms. In the absence of these requirements, non-ownership forms may be followed. Table 1.9 gives a brief sketch of the same. And these are explained briefly below.
Table 1.9 International Business Forms
1.4.1 Non-ownership forms
Non-ownership forms involve doing international business without ownership interests in the foreign countries concerned. These are (a) Merchandize export, import & counter trade, (b) Service Export and Import, (c) Licensing and Franchising, (d) Contract Manufacturing, (e) Management contracts and (f) Turnkey Contracts.
These forms are less risky as pull out is easy in times need.
a. Merchandize Exporting, Importing and counter trade: In economics, exchange of physically tangible goods between countries, involving the export, import, and re-export of goods at various stages of production is referred to trade in merchandize or tangible or visible items. The section of the balance of payments (BOP) dealing with this is called ‘balance on trade’. Merchandize trade is distinguished from invisible trade, which involves the export and import of physically intangible items such as services (covering receipts and payments arising from activities such as customer service or shipping, income from foreign investments, etc).
Exporting and importing are the basic and fundamental limbs of international business by a firm. These are the most traditional mode of entering the international market. Resulting international trade has been growing much faster than the world output resulting in greater world economic integration.
i.. Exporting is the appropriate strategy when one or more of the following conditions prevail.
• The volume of foreign business is not large enough to justify overseas production.
• Cost of production in the foreign market is high
• The foreign market is characterized by production bottlenecks like infrastructural problems, problems with materials supplies etc.
• There are political or other risks of investment in the foreign country.
• The company has no permanent interest in the foreign market concerned or that there is no guarantee of the market available for a long period.
• Foreign investment is not favoured by the foreign country concerned.
• Licensing or contract manufacturing is not a better alternative. Strategic advantages of exporting: Using excess capacity, cost reduction, risk spreading, higher top and bottom lines, leveraging brad equity overseas, exploring possibilities for production overseas, endearing the overseas environment prior to big scale launching, etc important advantages of exporting.
ii. Importing is favoured rather than home production when the following conditions exist:
• The volume of domestic requirement is not large enough to justify home production.
• Cost of production in the home market is high.
• The home market is characterized by production bottlenecks like infrastructural problems, problems with materials supplies etc.
• The company has permanent interest in the foreign market concerned or that there is a possibility overseas production may be resorted to soon.
• Foreign investment is favoured by the foreign country concerned with tax breaks and other sops.
• Strategic advantages of importing: Better quality supplies/components/products, complementing home production/product range, taking up import competition in the home market through cost-effective or quality enhanced imports, spreading risks of supply concerns important advantages of importing. iii. Counter trade: Counter trade is used as a strategy to increase exports, particularly by the developing countries. Counter trade has been successfully used by a number of companies as an entry strategy. For example, Pepsi Co gained entry to the USSR by employing this strategy. Counter trade is a form of international trade in which certain export and import transactions are directly linked with each other and in which import of goods are paid for by export of goods, instead of money payments.In the modern economies, most transactions involve monetary payments and receipts, either immediate or deferred. As against this, “counter trade refers to a variety of unconventional international trade practices which link exchange of goods - directly or indirectly - in an attempt to dispense with currency transactions”.
a. Service Export and Import
Most manufacturing firms indulge in service imports when they hire a foreign cargo ship to export their goods abroad or to bring home an imported machinery or a load of raw materials. Similarly insurance service on export or import cargo get exported or imported depending on whether domestic or foreign insurer is involved.
When a firm sends its executives abroad for conference or trade negotiation, service imports are involved when foreign airlines/hotels are used. When a firm brings executive personnel from abroad for conference or trade negotiation to home country, service exports are involved when foreigners use domestic airlines / hotels are used. Thus tourism, transportation, insurance, banking, education, consultancy, etc involve service exports and imports depending on whether foreign exchange is ultimately earned by the firm or spent. Nowadays manufacturing firms themselves have their financial/insurance subsidiaries and that their visible trade transactions give rise to invisible trade actions as well.
c. Licensing and Franchising
Licensing and Franchising, which involve minimal commitment of resources and effort on the part of the international marketer, are easy ways of entering the foreign markets. Under international licensing, a firm in
one country (the licensor) permits a form in another country (the licensee) to use its intellectual property (such as patents, trade marks, copyrights, technology, technical know-how, marketing skill or some other specific skill). The monetary benefit to the licensor is the royalty or fees which licensee pays. In many countries, such fees or royalties are regulated by the government; it does not exceed five per cent of the sales in many developing countries. A licensing agreement may also be one of cross licensing, wherein there is a mutual exchange of knowledge and/or patents. In cross0licensing, a cash payment may or may not be involved.
d. Contract Manufacturing
Under contract manufacturing, a company doing international marketing contracts with firms in foreign countries to manufacture or assemble the products while retaining the responsibility of marketing the product.
This is a common practice in international business. Contract manufacturing has the following advantages.
• The company does not have to commit resource for setting up production facilities.
• It frees the company from the risks of investing in foreign countries.
• If idle production capacity is readily available in the foreign country, it enables the marketer to get started immediately.
e. Management Contracting
Under the management contract, the firm providing the management know-how may not have any equity stake in the enterprise being managed. In short, in a management contract the supplier brings together a package of skills that will provide an integrated service to the client without incurring the risk and benefit of ownership.
Thus, as Kotler observes, management contracting is a low-risk method of getting into a foreign market and it starts yielding income right from the beginning. The arrangement is especially attractive if the contracting firm is given an option to purchase some shares in the managed company within a stated period. Management contract could, sometimes, bring in additional benefits for the managing company. It may obtain the business of exporting or selling otherwise of the products of the managed company or supplying the inputs required by the managed company.
f. Turnkey Contracts
Turnkey contracts mean that the contractor will do all the work needed to fix up a working network for you. All you have to do is ‘open the door’ or ‘Turn the key’ and step into a working system. Turnkey contracts are common in international business in the supply, erection and commissioning of plants, as in the case of oil refineries, steel mills, cement and fertilizer plants etc; construction projects and franchising agreements. “A turnkey operation is an agreement by the seller to supply a buyer with a facility fully equipped and ready to be operated by the buyer’s personnel, who will be trained by the seller. The term is sometimes used in fast - food franchising when a franchiser agrees to select a stone site, build the store, equip it, train the franchisee and employees and sometimes arrange for the financing”. Turnkey project contracting firms have rich experience in the field, provide complete solution – from lay-outing to handing over to production and are the single source responsibility. In Dec 2007, Ericsson has signed turnkey contracts as the total solution provider and prime integrator of Metropolitan Area Networks (MAN) to support the launch of seven digital cities across Greece.
Under the agreements Ericsson will supply and install fiber optic telecommunications networks in the municipalities of Agrinio, Chania, Ermoupolis, Ierapetra, Iraklio, Kozani and Rethymno. The networks will initially link municipal buildings, such as the general hospital, town hall, schools and universities.
1.4.2 Ownership or Foreign Direct investments forms
Ownership form involvewhen the firm decides to own production/distribution facility in the foreign land.
Eventually foreign investment gets involved. There are many alternatives like wholly owned subsidiaries, JVs, Strategic alliances, M&A, etc..
a. Wholly Owned Manufacturing Facilities:
Companies with long term and substantial interest in the foreign market normally establish fully owned manufacturing facilities there. As Drucker points out, “it is simply not possible to maintain substantial market standing in an important area unless one has a physical presence of a producer”. A number of factors like trade
barriers, differences in the production and other costs, government policies, etc., encourage the establishment of production facilities in the foreign markets.
b. Assembly Operations:
As Miracle and Albaum point out, a manufacturer who wants many of the advantages that are associated with overseas manufacturing facilities and yet does not want to go that far may find it desirable to establish overseas assembly facilities in selected markets. In a sense, the establishment of an assembly operation represents a cross between exporting and overseas manufacturing. RF Micro Devices, Inc. has established an assembly facility at its Beijing, China, location to provide internal module packaging capabilities. The new facility is expected to help streamline RFMD’s manufacturing supply chain and contribute directly to the company’s ongoing gross margin improvement plan. RFMD expects to lower its overall manufacturing cost structure, provide for guaranteed assembly capacity and enable cycle time reductions. Cycle time reductions will be driven by both reduced time in transit to third-party suppliers as well as enhanced proximity to handset production, which is increasingly located in Asia. Additionally, by housing its new assembly operations in its existing Beijing facility, RFMD significantly strengthens its position as a one-stop shop for semiconductor assembly, test and tape and reel.
b. Joint Venture:
Joint venture is a very common strategy of entering the foreign market. In the widest sense, any form of association which implies collaboration for more than a transitory period is a joint venture (pure trading operations are not included in this concept). There are different types of joint ventures. These are as follows:
• Joint ventures by adoption: Acquisition of part of the equity in a foreign entrepreneurial company, whereby the foreign company becomes adopted unit of the joint venturer along with the promoter.
• Joint ventures by rebirth: When the foreign partner transfers technology to an ailing domestic business and takes equity stake in the revived business.
• Joint ventures by procreation: A truely new venture is born out of a marriage between the technical and/or market-know how of the partners.
• Joint ventures through family ties: This occurs when suppliers join together with each other or when a manufacturer takes an equity position in a supplier business.
Joint ventures are good as these involve strengths of the partners mingled and magnified and synergies emanate.
Joint ventures lead to synergies driven through core-competencies. There are technical, financial, production, marketing and managerial synergies to drive from joint ventures. Multinational companies enter foreign countries through joint venture when a JV is viable, i.e., the local firm’s profits under a JV always exceed the corresponding levels under direct FDI. However, when protection of IPRs (intellectual property rights) is important, FDI may be preferred to a JV. This is one of the reasons when IT and Pharma MNCs enter third worlds with poor protection of IPRs, they take a wholly owned subsidiary rather than a JV. Strengthening the IPR regime serves as a priority to induce a JV and with it technology transfer. But sometimes, the host government may press for JV instead a FDI. In the 1980s and 1990s, joint ventures were required by the Chinese government. But now there are no restrictions for most sectors of the manufacturing industry, he said.
c. Third Country Location:
Third country location is sometimes used as an entry strategy. When there are no commercial transactions between two nations because of political reasons or when direct transactions between two nations are difficult due to political reasons or the like, a firm in one of these nations which wants to enter the other market will have to operate from a third country base. For example, Taiwanese entrepreneurs found it easy to enter People of Republic of China through bases in Hong Kong.
d. Mergers & Acquisitions:
Mergers & Acquisitions (M & A) have been a very important market entry strategy as well as expansion strategy. A number of Indian companies have also used this entry strategy. Mergers & acquisitions have certain specific advantages. It provides instant access to markets and distribution network. As one of the most difficult
areas in international marketing is the distribution, this is often a very important consideration for M & A.
Another important objective of M and A is to obtain access to new technology or a patent right. M and A also has the advantage of reducing the competition.
e. Strategic Alliance:
Strategic alliance has been becoming more and more popular in international business. This strategy seeks to enhance the long term competitive advantage of the firm by forming alliance with its competitors, existing or potential in critical areas, instead of competing with each other. “The goals are to leverage critical capabilities, increase the flow of innovation and increase flexibility in responding to market and technological changes”.
Strategic alliance is also sometimes used as a market entry strategy. For example, a firm may enter a foreign market by forming an alliance with a firm in the foreign market for marketing or distributing the former’s products. A U.S. pharmaceutical firm may use the sales promotion and distribution infrastructure of a Japanese pharmaceutical firm to sell its products in Japan. In return, the Japanese firm can use the same strategy for the sale of its products in the U.S. market. Strategic alliance, more than an entry strategy, is a competitive strategy.