MODULE 2

INTERNATIONAL BUSINESS AND TRADE

SESSION TOIPC 2:  International Entry Choices

LEARNING OUTCOMES:
The following specific learning objectives are expected to be realized at the end of the session: 

1. To enumerate and understand the international entry choices:

 Exports
 Licenses
 Outsourcing and Offshoring
 Contracting
 Franchises
 Joint Ventures
 Subsidiaries
 Strategic Alliances

KEY POINTS:

International Entry Outsourcing and Joint Ventures and Subsidiaries

Offshoring
Exports and Licenses Contracting and Strategic Alliances
Franchises

CORE CONTENT:
Introduction 
International firms may choose to do business in a variety of ways. Some of the most common
are exports, licenses, outsourcing, contracts and turnkey operations, franchises, joint ventures, wholly
owned subsidiaries, and strategic alliances.

IN-TEXT ACTIVITIES:

International Entry Choices

International firms may choose to do business in a variety of ways. Some of the most common
are exports, licenses, outsourcing, contracts and turnkey operations, franchises, joint ventures, wholly
owned subsidiaries, and strategic alliances.

Exporting

Exporting is often the first international choice for firms, and many firms rely substantially on
exports throughout their history. Exports are seen as relatively simple because the firm is relying on
domestic production, can use a variety of intermediaries to assist in the process, and expects its foreign
customers to deal with the marketing and sales issues. Many firms begin by exporting reactively; then
become proactive when they realize the potential benefits of addressing a market that is much larger than
the domestic one. Effective exporting requires attention to detail if the process is to be successful; for
example, the exporter needs to decide if and when to use different intermediaries, select an appropriate
transportation method, prepare export documentation, prepare the product, arrange acceptable payment
terms, and so on. Most importantly, the exporter usually leaves marketing and sales to the foreign
customers, and these may not receive the same attention as if the firm itself undertook these activities.
Larger exporters often undertake their own marketing and establish sales subsidiaries in important foreign
markets.

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Licensing

Licenses are granted from a licensor to a licensee for the rights to some intangible property (e.g.,
patents, processes, copyrights, trademarks) for agreed on compensation (a royalty payment). Many
companies feel that production in a foreign country is desirable but they do not want to undertake this
production themselves. In this situation the firm can grant a license to a foreign firm to undertake the
production. The licensing agreement gives access to foreign markets through foreign production without
the necessity of investing in the foreign location. This is particularly attractive for a company that does not
have the financial or managerial capacity to invest and undertake foreign production. The major
disadvantage to a licensing agreement is the dependence on the foreign producer for quality, efficiency,
and promotion of the product—if the licensee is not effective, this reflects on the licensor. In addition, the
licensor risks losing some of its technology and creating a potential competitor. This means the licensor
should choose a licensee carefully to be sure the licensee will perform at an acceptable level and is
trustworthy. The agreement is important to both parties and should ensure that both parties benefit
equitably.

Outsourcing and Offshoring

Outsourcing is where a business subcontracts one aspect of its business operations, such as
payroll or advertising. Offshoring refers to when a company outsources a business process to a company
in another country. Often companies outsource in order to take advantage of lower labor costs. Other
motivations for outsourcing include the transfer of risk to a third party.

Contracting

Contracts are used frequently by firms that provide specialized services, such as management,
technical knowledge, engineering, information technology, education, and so on, in a foreign location for a
specified time period and fee. Contracts are attractive for firms that have talents not being fully utilized at
home and in demand in foreign locations. They are relatively short term, allowing for flexibility, and the fee
is usually fixed so that revenues are known in advance. The major drawback is their short-term nature,
which means that the contracting firm needs to develop new business constantly and negotiate new
contracts. This negotiation is time consuming, costly, and requires skill at cross-cultural negotiations.
Revenues are likely to be uneven and the firm must be able to weather periods when no new contracts
materialize.

Franchising

Similar to licensing agreements, franchises involve the sale of the right to operate a complete
business operation. Well-known examples include independently owned fast-food restaurants like
McDonald's and Pizza Hut. A successful franchise requires control over something that others are willing
to pay for, such as a name, set of products, or a way of doing things, and the availability of willing and
able franchisees. Finding franchisees and maintaining control over franchisable assets in foreign
countries can be difficult; to be successful at international franchising, firms need to ensure they can
accomplish both of these.

Joint Ventures

Joint ventures involve shared ownership in a subsidiary company. A joint venture allows a firm to
take an investment position in a foreign location without taking on the complete responsibility for the
foreign investment. Joint ventures can take many forms. For example, there can be two partners or more,
partners can share equally or have varying stakes, partners can come from the private sector or the
public, partners can be silent or active, partners can be local or international. The decisions on what to
share, how much to share, with whom to share, and how long to share are all important to the success of
a joint venture. Joint ventures have been likened to marriages, with the suggestion that the choice of
partner is critically important. Many joint ventures fail because partners have not agreed on their

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objectives and find it difficult to work out conflicts. Joint ventures provide an effective international entry
when partners are complementary, but firms need to be thorough in their preparation for a joint venture.

Subsidiaries

Wholly owned subsidiaries involve the establishment of businesses in foreign locations that are
owned entirely by the investing firm. This entry choice puts the investor parent in full control of operations
but also requires the ability to provide the needed capital and management, and to take on all of the risk.
Where control is important and the firm is capable of the investment, it is often the preferred choice. Other
firms feel the need for local input from local partners, or specialized input from international partners, and
opt for joint ventures or strategic alliances, even where they are financially capable of 100 percent
ownership.

Strategic Alliances

Strategic alliances are arrangements among companies to cooperate for strategic purposes.
Licenses and joint ventures are forms of strategic alliances but are often differentiated from them.
Strategic alliances can involve no joint ownership or specific license agreement, but rather two companies
working together to develop a synergy. Firms form strategic alliances for a variety of reasons. Ideally,
each partner can bring complementary assets to the table, resulting in a competitive advantage for the
participants collectively. Businesses in a strategic alliance can benefit from many aspects of a cooperative
relationship: access to unfamiliar or untapped markets, risk sharing, economies of scale, shared
technology, and decreased costs. Joint advertising programs are a form of strategic alliance, as are joint
research and development programs. Strategic alliances seem to make some firms vulnerable to loss of
competitive advantage, especially where small firms ally with larger firms. In spite of this, many smaller
firms find that strategic alliances allow them to enter the international arena when they could not do so
alone.

Transnational Companies

A transnational strategy allows for the attainment of benefits inherent in both global and
multidomestic strategies. The overseas components are integrated into the overall corporate structure
across several dimensions, and each of the components is empowered to become a source of
specialized innovation. It is a management approach in which an organization integrates its global
business activities through close cooperation and interdependence among its headquarters, operations,
and international subsidiaries, and its use of appropriate global information technologies. This is
especially important as globalizing becomes the norm, and as firms begin to compete for the same
resources on both the regional and global scales.

The key philosophy of a transnational organization is adaptation to all environmental situations

and achieving flexibility by capitalizing on knowledge flows (which take the form of decisions and value-
added information) and two-way communication throughout the organization. The principal characteristic
of a transnational strategy is the differentiated contributions by all its units to integrated worldwide
operations. As one of its other characteristics, a joint innovation by a company's headquarters and by
some of its overseas units leads to the development of relatively standardized yet flexible products and
services that can capture several local markets. Having a product or service that is recognizable
anywhere and universal enough to capture multiple demographics in multiple regions will enable a firm to
successfully develop on the global stage.

Structure follows strategy, implying that a transnational strategy must have an appropriate
structure in order to implement the strategy. Just as the transnational strategy is a combination or hybrid
strategy between global and multi-domestic strategies, the organizational structure of firms pursuing
transnational strategies is a structure that draws on characteristics of the worldwide geographic structure
and the worldwide product divisional structure. The combination of mechanisms needed is somewhat
contradictory, because the structure must be centralized and decentralized, integrated and nonintegrated,
and formalized and informalized. But firms that can successfully implement this strategy and structure
often perform better than firms pursuing only multidomestic or global strategies.

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 It is important to note that criticisms of transnational systems do exist, typically centered on the
outsourcing of jobs, poor working conditions in other countries, and other issues with which the U.S.
economy and flow of goods has suffered for quite some time. While such situations aid in the expansion
of companies, the actual existence of jobs in places that before had none, and a wider availability of
goods across the globe, they also cause local disruption as jobs are moved.

SESSION SUMMARY

Organizations competing on an international basis face choices in terms of resource allocation,

the balance of authority between the central office and business units, and the degree to which products
and services are customized in order to accommodate tastes and preferences of local markets. When
employing a transnational strategy, the goal is to combine elements of global and multidomestic
strategies.

REFERENCES
 
Refer to the references listed in the syllabus of the subject. 

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