UNIT 3: ENTRY INTO THE INTERNATIONAL MARKETS

ENTRY STRATEGIES
There are various entry strategies through which the firms can enter international trade. These are:
1. Export Based Entry is a very popular and beginners’ method of internationalization and international
trade. It requires low amount of a firm’s involvement in terms of the need of firm’s allocation of
resources to serve overseas market. In this method firm uses its domestic market for production
distribution and administration and a portion of the produce is marketed abroad.
a) Direct Exporting: Means a producer or supplier directly sells goods and services in an international
market through a directly managed channel (distributors, foreign retailers and other intermediaries,
sales representatives or directly selling to the end user).
Indirect Exporting: means selling of the product to an intermediary usually a third party who in turn
sells either to customers or sells it’s to importing wholesalers. The easiest and low risk
2. Non-Equity Based Entry
Licensing

Franchising - is similar to licensing but in franchising other than granting permission to use the name,
trademark and process of the franchisor the franchisee also gets assistance with the operations or supply of
raw materials from the franchisor

Contract Manufacturing

Management Contracts
Management contracts are methods in which firm agrees to rent its expertise or know-how to government or firm
in the form of personnel who enter the foreign environment and run the concern.
This method of involvement in foreign markets is used with a new business facility after expropriation of a
concern by a national government or when an operation is in trouble.
Management contracts are frequently used in concern with turnkey operations.

Direct Investment
Direct investment means a firm investing directly through real commitment of resources viz., capital and
personnel and assets in the foreign land beyond domestic borders. This investment provides greater
control of costs and operations and improves profitability. The only factor of risk in such investment is
the business environment factors prevailing in the foreign land. Direct investment as an international
activity runs a continuum from joint ventures to wholly owned subsidiary. These methods are high in
terms of rewards and also high in terms of risks involved.
Multinational firms prefer to make direct investment because of the following reasons:
a) To gain access to enlarged market.
b) To take advantage of cost differentials arising from cheaper sources of factors of production i.e., land,
labour and capital available in the foreign market. These reasons help in increasing the profitability of
the firm. 1
 c) To counter strategic moves of the competitors or to follow a market leader in new markets.

Strategic Alliances or Joint Ventures

Joint ventures are also strategic alliances in which two or more firms or entities join together to establish
some sort of business operation. Strategic alliances may be formed by two partners. It can be between two
MNCs, one MNC and a local business person or MNC and government. If there are two or more
participants in the deal the relationship can also be called as consortium operation. Parties in the joint
venture contribute equity, capital or assets. Percentage of ownership depends on the contribution of the
capital. Some countries stipulate the relative amount of ownership allowable to foreign firms in joint
ventures.
Table 3.4: Advantages and Disadvantages of Strategic Alliance
Advantages Disadvantages
Opportunity to increase growth and access to Limits on profit repatriation to the parent firm as it is
new markets while avoiding excessive tariffs sometimes restricted by the host countries.
and taxes associated with importing products.
Joining forces with local businesses often Successful joint venture operations are becoming an
neutralizes local existing and potential inviting target for nationalization.
competition and protects the firm against
business environmental risks.
Easier to raise capital. MNC may have the capability of achieving
profitability and growth in shorter time frame than the
local partner who might be more concerned about
long profitability and providing employment
opportunities.
Host government sometimes provides tax There might be mismatch of business objectives
benefits to encourage foreign firm’s joint between the two firms entering into joint venture.
ventures.
Risks shared by partners, thus joint ventures are Lack of complete control on the operations
relatively low risk operations. remains a predominant problem.

Wholly Owned Subsidiaries

A complete control over operations, decision making and profits can only be established by wholly owned
subsidiary on the foreign soil.

A firm retains total control of its marketing, pricing, production, decisions and can maintain greater
security over its technological assets by establishing its own foreign arm. Firm is also entitled for cent
percent profits generated by the enterprise but also bears all the risks involved in the business like
expropriation limits on profits being repatriated and locally operating government polices rules and
regulation. In establishing and entering into a new international market the firm can choose one of the
routes explained below.

2i) Acquiring an ongoing operation.

 ii) Start a completely new firm from the scratch (Green field strategy)
-This method can be used if no suitable facilities are found to be acquired or if the firm has special
requirements of facilities.
iii) Buying a new firm known (Brownfield strategy) having the advantage of avoiding startup costs of
capital and time lag and is often faster and easier to at local levels and is cheaper than building a
new firm from the scratch. Buying also has the advantages or not adding to a country’s existing
capacity and improving goodwill with the host country nationals.

Globalized Operations

Consumers around the world are increasingly similar in their goals and requirements of product attributes
and products resulting in the world moving towards a global market with standardized products across
countries and all cultures. Increasing demand for the products results in low cost of manufacture as an
outcome of economies of scale. Such firms are characterized by globalized operations as distinct from
multinationals, firms with globalized operations are capable of taking business opportunities across the
world and constrained to specific sectors for example, PepsiCo, Coca Cola, and Levis Strauss etc. ranging
from consumer goods to fast food.

Portfolio Investments

Portfolio Investments do not need the physical presence of a firm’s personnel or products in a foreign
country. These investments can be in the form of securities, Notes, bonds, Commercial paper, and non-
controlling stock certificates of deposits or investments through foreign bank accounts or lending through
foreign bank loans. Investors invest in foreign economies to achieve higher rates of return, avoid political
risks in the home country or speculate in the foreign exchange market.

Consortia, Keiretsu and Chaebol

Consortia is a business strategy to create a sizeable interlocking relationship between firms in an industry.
This strategy enhances the competitive advantage of the firms in understanding.

Keiretsu is a coalition of many firms controlled by a dominant central firm aimed at minimizing the
competitive risk through cost sharing and economies of scale.

Chaebol is largely applicable to Korean consortia financed by government in order to gain competitive
and strategic benefits.

Activity 1

1. Briefly describe licensing and its advantages and disadvantages.

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2. Explain franchising with examples.

GOVERNMENT INVOLVEMENT IN TRADE RESTRICTIONS AND INCENTIVES

Governments in most of the countries do restrict or support international trade or transfer of resources to
foreign countries. Intervention of this kind may take the form of controlling the flow of trade and
transfer of goods and also there may be a control on the transfer of capital flows or controlling the
movement of personnel and technology. Rationale for intervention may vary from country to country and
government to government and fall into several patterns. Government is motivated by economic
situation and interests of the people such as revenue, currency rates, economic and monetary
considerations along with geographic and demographic competency levels of the country are the major
factors which contribute to policies of various countries on foreign trade. Specific concerns in the
country like health and safety considerations or full employment objectives also play an important role
in the foreign trade Policy. The list of interventions is given below.

Protectionism –Refers to government intervention in order to protect some specific industries in the
economy. But protectionism need to be interpreted as protecting inefficient and incompetent industries
which are not competitive in foreign market, instead the industry should make structural changes to
enhance its efficiency. Rationale for this intervention is-

a) Protect industry to ensure full employment opportunity imports and relying more on domestic
production which results in creation of jobs.

b) Protect infant industry pertinent in underdeveloped and less developed economies. And justifying
this protection stating that infant industries cannot compete with established large industry thus
they need some protection.

c) Protecting specific industries is a part of the government’s industrial policy decision in order to
promote specific sectors in the economy for diversifying the economic structure. Protection is
usually given to the sectors which are beneficial for the economy, earn foreign exchange and yield
higher marginal returns.

d) Rationale of protectionism is more based on emotional arguments than economic.

Protectionism leads to higher prices for consumer for imported products and components and may lead to
retaliation by importing countries and affect the exports of the country. It may result in increased
opportunity costs by allocating the resources of a country inappropriately at the expense of other sectors.

Method of Government Intervention

a) Application of tariffs to exports or imports.

b) Application of Non-tariff Barriers.

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1. Tariffs: Tariffs or duties are a basic method of governmental intervention in trade used to protect
industries by increasing the price of imports in order to make imported products costlier than the
domestic products. Tariffs may be placed on exports as well as imports in the form of duties and are
most typical control mechanism on international trade.

Tariffs are assessed in three different ways.

 Ad valorem duties: Levied as percentage on the value of goods.

 Specific Duties: Assessed on the physical unit of measurement for example, duties imposed per ton
metric or any such fixed unit.

 Compound Tariff: Is a combination of Ad valorem and specific duties.

2. Non-Tariff Barriers- Non- tariff barriers are a matter of concern and controversial topic in trade
activity over the past decade because they are not traditional method of discouraging imports through
the application of duties. They work towards reducing the pace of flow of goods into a country by
enhancing physical and administration difficulties. Non trade barriers take number of forms that
provide effective trade restraints.

 Discrimination by government against foreign suppliers in bidding procedures.

 Rigorous customs and country entry procedures.

 Excessive and severe laid down standard inspection procedures.

 Elaborate safety specifications and domestic testing requirements.

 Laid down required percentages of domestic material content.

Some countries tend to restrict and regulate products which they feel is harmful to the citizens of the
country for example, Canada has a strict entry restriction for tobacco products on to the country. India’s
policy does not easily permit Alcohol manufacturing and high import duties on some specific luxury
goods like automobiles.

Quotas

Countries impose quotas to restrict quality volume or value-based imports. These quotas may be
unilateral according to the commodity and a stipulated amount of aggregate import is permitted from
any source or country. Alternatively the government of a country may decide and be selective on
regional basis.

A type of quota is an embargo which prohibits all types of trade between countries and voluntary entry
restriction is another type encountered in recent trade history in which countries agree to restrict their
exports to a country, but are forced into compliance through the use of direct or subtle political pressure
from major trading partners. Imposition of quotas is to restrict inflow of certain commodities into the
country which often leads to higher import prices. 5
 Activity 2

1. Briefly explain methods of government intervention in foreign trade.

2. How does government involvement affect trade?

SUMMARY

Basic functional and operational activities in international business are same as domestic business. The
difference is across boundaries operations encounters different economies, cultures, legal systems,
governments and languages which must be integrated into business policies and practices. Entry and
expansion of a firm may necessitate entry into international trade. Entry into international business varies
among continuum ranging from basic entry levels like exporting to the rest like licensing, franchising,
contract manufacturing, direct investment, joint ventures, wholly owned subsidiaries, globalized
operations, and portfolio investments in a continuum. Some countries have low risk and give lots of
support to international enterprisers and others have dismal interest and policy support. Governments in
the host country play a crucial role in deciding either to restrict or support international business. Often
international business policy of a government is in alignment with monetary and economic goal along
with maintenance of national security, improve health, safety and employment level or support specific
political objectives. Protectionism, tariffs non-tariff barriers and government interventions are the
methods of restricting international trade.

KEY WORDS

International Business: A cross boarder transaction between individuals, business or boarder entities for
anything such as goods, services, technology, knowledge, etc.

Licensing: A licensor (i.e. the firm with the technology or brand) can provide their products, services,
brand and/or technology to a licensee via an agreement. This agreement will describe the terms of the
strategic alliance, allowing the licensor affordable and low risk entry to a foreign market while the
licensee can gain access to the competitive advantages and unique assets of another firm.

Franchising: Parent firm gives right to other firms to carry on business in its name.

Outsourcing and Off-shoring: Giving contracts to international firms for certain business purpose.

Multinational Firms (MNCs): The firms that are conducting business in more than one country.

Foreign Direct Investment (FDI): Investment made by an individual or a firm located in one country to
the business interest located in another foreign country. Investing directly into production in a country by

6a firm located in another country either by buying a firm in the target country or by expanding operations
of an existing business in that country.

Franchisee: A holder of a franchise, a person who is granted a franchise.

Franchisor: A firm or person who grants franchises.

Franchising: is a business set up in which an organization (The franchiser) has the option to grant
entrepreneurial rights to a local firm (Franchisee) to access its brand, trademarks and products for value.

Barter: Exchange of goods and services without involving currency.

Counter Purchase: Sale of goods and services to one firm in another country by a firm that promises to
make future purchase of a specific product from the same firm in that country.

Switch Trading: Practice in which one firm sells to another firm to fulfill the obligation made to make
purchase in a given country.

Joint Venture: A cooperative partnership between two individuals or businesses in which profits and
risks are shared.

Contract Manufacturing: Is a business model in which firm hires a contract manufacture to produce
components or final products based on the hiring firms design.

Exporting: The sale of capital goods and services across international borders or territories or in other
words, act of selling to a foreign country.

Brownfield Strategy: The entering of a foreign market via the purchase of an existing firm.

Foreign Exchange: Transactions involving the exchange of one currency for another.

SELF- ASSESSMENT QUESTIONS

1. Explain the suitability of a corporation to go international through joint venture approach rather
than a wholly subsidiary approach. Give a suitable example.

2. How can foreign direct investment benefit or cause harm to an economy receiving it. Discuss.

3. Discuss the methods used by the governments to protect their domestic business environment.

4. Describe various factors considered by a firm to conduct business internationally.

5. Prescribe suitable method for going international with proper justification for the following
sectors.

a) An automobile manufacturer

b) A software developer

c) An oil exploration-production firm

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 d) An electrical power plant builder

e) A farmer with a large surplus of wheat

f) A restaurant operator with a new barbecued ribs recipe.