MODES OF ENTRY INTO INTERNATIONAL MARKET
WHY INTERNATIONAL BUSINESS?
About a century ago, most countries were self sustaining. they could produce produce and market goods for their own people. With advancing technology and melting of boundaries between nations, people realized that other countries were specialized in some areas and if they could borrow their technology and implement them in their own country.
Let us assume that there are two countries A and B with A major wheat producer and B a leader in cotton production. Both countries have surplus production of wheat and cotton respectively.
If these countries make a contract to provide their surplus production to each other, both will be benefited.
FOLLOWING ARE THE MODES OF ENTRY INTO INTERNATIONAL MARKET:
EXPORT AND IMPORT:
Exporting of goods involves sending of goods and services of our country to another foreign country. Exporting is the simplest and widely used mode of entering foreign markets.
Forms of exporting include indirect exporting, direct exporting and intra- corporate transfers.
LICENSING:
It is a form of direct export. In this mode of entry, the manufacturer gives the right to use its technology, work method, copyright and patents, brand names, trademarks and etc. To a manufacturer in a foreign country. The manufacturer in a domestic country is called as a ‘licensor’ and the manufacturer in a foreign country is called as a ‘licensee’. Though it is an easy way to enter into foreign markets, the cost is more. Sometimes the manufacturer of both the country enters into a mutual exchange of technology and patent. This is known as a cross-licensing.
FRANCHISING:
Franchising is a form of licensing. Hence more control is exercised over a franchise as compared to licensing. Under franchising, an independent organization operates the business under the name of another country. A fee is paid by the franchisee to the franchisor. A major difference between franchising and licensing is that franchising is more applied to services while licensing is more related to the production and marketing of goods. The rules of franchising are stricter.
The major franchisers operating in India are McDonalds, Pizza hut, Wal-Mart, Dominos, Holiday Inn and Avis Car Rentals.
CONTRACT MANUFACTURING:
In this mode, an international company enters into a long term contract with local firms to undertake production of specified goods for a given period for subsequent sale by a former. The international company provides the technical know-how to the local firms. In this system there is a full control over the external marketing programme.
JOINT VENTURES:
When two or more firms come together to form a new business having separate and distinct legal entity different from its patent name, joint venture is form. It emerges from the efforts of the exporter and an entrepreneur in the importing country to work together. Joint venture involves shared ownership. Various environmental factors like social, technological, economical and political encourage the formation of joint venture.
A number of Indian manufacturers and exporters are involved in a number of joint ventures in Asia and Africa.
WHOLLY OWNED SUBSIDY:
Some companies like to have complete control over their operations in the foreign country. These companies prefer this mode of entering into international markets. In wholly owned subsidiaries, the parent company makes 100% investments in its equity capital and thus acquires full control over the foreign country. This can be done in two ways-
- The company sets up a new firm to start operations in the foreign country. This method is also known as green field venture.
OR
- The company acquires an established firm in a foreign country. It then uses that firm to manufacture and market its product in the host country.
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