MODES OF ENTERING INTERNATIONAL

BUSINESS

Under the Supervision of: Respected Mr. Shafi Sir Presented By: Habib Zafar Khan LL.M 2nd Year 2012-14 NALSAR University of Law Hyderabad.

SCHEME OF THE PRESENTATION

Introduction; Exporting; Licensing; Franchising; Contract Manufacturing; Management Contracts; Turnkey Projects; Assembly Operations; Integrated Local Production Operations; Fully Owned Manufacturing; Foreign Direct Investment; Alliances (Mergers, Acquisitions, Joint Ventures); Comparison of Different Modes of Entry; Functional Alliances; Managing Conflict Situations; Break-up of Alliances.

Introduction
Factors Affecting

Degree of risk Equity Modes

Economic and political factors Size of Market Purchasing Power Nature of competition

NonEquity Modes

Control and commitment of resources they require

Return on investment they promise

Timing of entry : First mover advantage

SYNOPTICALLY THE FACTORS CAN BE

CATEGORIZED AS
Firm Size Ownership Advantage

Multinational Experience Ability to develop differentiated products

Location Advantage of Market

Market Potential Investment Risk

Internalization advantages.

EXPORTING

Exporting

Direct

Indirect

Sales representatives

Importing distributors

Types Export trading companies (ETCs)

Export management companies (EMCs)

Export Merchant

DIRECT EXPORT
Advantages Control over selection of foreign markets and choice of foreign representative companies Good information feedback from target market, developing better relationships with the buyers Better protection of trademarks, patents, goodwill, and other intangible property Potentially greater sales, and therefore greater profit, than with indirect exporting.[ Disadvantages Higher start-up costs and higher risks as opposed to indirect exporting Requires higher investments of time, resources and personnel and also organizational changes Greater information requirements Longer time-to-market as opposed to indirect exporting

INDIRECT EXPORTS
Advantages Fast market access Concentration of resources towards production Little or no financial commitment as the clients' exports usually covers most expenses associated with international sales. Low risk exists for companies who consider their domestic market to be more important and for companies that are still developing their R&D, marketing, and sales strategies. Export management is outsourced, alleviating pressure from management team No direct handle of export processes.
Disadvantages Higher risk than with direct exporting Little or no control over distribution, sales, marketing, etc. as opposed to direct exporting Inability to learn how to operate overseas Wrong choice of market and distributor may lead to inadequate market feedback affecting the international success of the company Potentially lower sales as compared to direct exporting, due to wrong choice of market and distributors by export partners.

FACTORS EFFECTING EXPORTS

Tariffs Non Tariffs Subsidies Dumping

Protecting Domestic Market

Limitations etc.

DEVELOPMENT OF EXPORT CONCEPT

Mercantilism Theory of Absolute Advantage Theory of Comparative Advantage

Note: An application for grant of Export License for such items must be submitted to the Director General of Foreign Trade (DGFT). The Export Licensing Committee under the Chairmanship of Export Commissioner considers such applications on merits for issue of export licenses.

LICENSING

In this mode of entry, the domestic manufacturer leases the right to use its intellectual property (i.e.) technology, copy rights, brand name etc. to a manufacturer in a foreign country for a fee. licensor and licensee Advantages 1. Low investment on the part of licensor. 2. Low financial risk to the licensor. 3 Licensor can investigate the foreign market without much effort on his part. 4. Licensee gets the benefits with less investment on research and development 5. Licensee escapes himself from the risk of product failure. Disadvantages 1. It reduces market opportunities for both 2. Both parties have to maintain the product quality and promote the product . Therefore one party can affect the other through their improper acts. 3. Chance for misunderstanding between the parties. 4. Chance for leakages of the trade secrets of the licensor. 5. Licensee may develop his reputation 6. Licensee may sell the product outside the agreed territory and after the expiry of the contract

FRANCHISING

The franchising system can be defined as: A system in which semi-independent business owners (franchisees) pay fees and royalties to a parent company (franchiser) in return for the right to become identified with its trademark, to sell its products or services, and often to use its business format and system. Compared to licensing, franchising agreements tends to be longer and the franchisor offers a broader package of rights and resources which usually includes: equipment, managerial systems, operation manual, initial trainings, site approval and all the support necessary for the franchisee to run its business in the same way it is done by the franchisor licensing agreement involves things such as intellectual property, trade secrets and others while in franchising it is limited to trademarks and operating know-how of the business. franchising is to avoid sharing the strategic activity (competitor)

Advantages of the international franchising mode: Low political risk Low cost Allows simultaneous expansion into different regions of the world Well selected partners bring financial investment as well as managerial capabilities to the operation. Disadvantages of the international franchising mode: Franchisees may turn into future competitors Demand of franchisees may be scarce when starting to franchise a company, which can lead to making agreements with the wrong candidates A wrong franchisee may ruin the companys name and reputation in the market Comparing to other modes such as exporting and even licensing, international franchising requires a greater financial investment to attract prospects and support and manage franchisees.

CONTRACT MANUFACTURING
A contract manufacturer ("CM") is a manufacturer that contracts with a firm for components or products. It is a form of outsourcing. In a contract manufacturing business model, the hiring firm approaches the contract manufacturer with a design or formula. The contract manufacturer will quote the parts based on processes, labor, tooling, and material costs. Typically a hiring firm will request quotes from multiple CMs. After the bidding process is complete, the hiring firm will select a source, and then, for the agreed-upon price, the CM acts as the hiring firm's factory, producing and shipping units of the design on behalf of the hiring firm Many industries use this process, especially the aerospace, defense, computer, semiconductor, energ y, medical, food manufacturing, personal care, and automotive fields

Advantages: Cost Savings Companies save on their cost of capital because they do not have to pay for a facility and the equipment needed for production. They can also save on labor costs such as wages, training and benefits. Some companies may look to contract manufacture in low-cost countries, such as China, to benefit from the low cost of labor. Mutual Benefit to Contract Site A contract between the manufacturer and the company its producing for may last several years. The manufacturer will know that it will have a steady flow of business until then. Advanced Skills Companies can take advantage of skills that they may not possess, but the contract manufacturer does. The contract manufacturer is likely to have relationships formed with raw material suppliers or methods of efficiency within their production Contract Manufacturers are likely to have their own methods of quality control in place that helps them to detect counterfeit or damaged materials early. Focus Companies can focus on their core competencies better if they can hand off base production to an outside company. Economies of Scale Contract Manufacturers have multiple customers that they produce for. Because they are servicing multiple customers, they can offer reduced costs in acquiring raw materials by benefiting from economies of scale. The more units there are in one shipment, the less expensive the price per unit will be.

DISADVANTAGES:

Lack of Control . They can only suggest strategies to the contract manufacturer; they cannot force them to implement them. Relationships - It is imperative that the company forms a good relationship with its contract manufacturer. Quality concerns . The company has to rely on the contract manufacturer for having good suppliers that also meet these standards. Intellectual Property Loss When entering into a contract, a company is divulging their formulas or technologies. This is why it is important that a company not give out any of its core competencies to contract manufacturers. Outsourcing Risks Although outsourcing to low-cost countries has become very popular, it does bring along risks such as language barriers, cultural differences and long lead times. This could make the management of contract manufacturers more difficult, expensive and time-consuming. Capacity Constraints If a company does not make up a large portion of the contract manufacturers business, they may find that they are deprioritized over other companies during high production periods. Thus, they may not obtain the product they need when they need it. Loss of Flexibility and Responsiveness - Without direct control over the manufacturing facility, the company will lose some of its ability to respond to disruptions in the supply chain. It may also hurt their ability to respond to demand fluctuations, risking their customer service levels.

MANAGEMENT CONTRACTS
A management contract is an arrangement under which operational control of an enterprise is vested by contract in a separate enterprise which performs the necessary managerial functions in return for a fee. Management contracts involve not just selling a method of doing things (as with franchising or licensing) but involve actually doing them. A management contract can involve a wide range of functions, such as technical operation of a production facility, management of personnel, accounting, marketing services and training. Example: Airline Industry, Management contracts are often formed where there is a lack of local skills to run a project. It is an alternative to foreign direct investment as it does not involve as high risk and can yield higher returns for the company. The first recorded management contract was initiated by Qantas and Duncan Upton in 1978.

TURNKEY PROJECTS

A turnkey project refers to a project when clients pay contractors to design and construct new facilities and train personnel. A turnkey project is way for a foreign company to export its process and technology to other countries by building a plant in that country. Industrial companies that specialize in complex production technologies normally use turnkey projects as an entry strategy. Turnkey projects allow firms to export their process know-how to countries where FDI might be prohibited, thereby enabling the firm to earn a greater return from this asset. The disadvantage is that the firm may inadvertently create efficient global competitors in the process. A turnkey project is a contract under which a firm agrees to fully design , construct and equip a manufacturing/ business/services facility and turn the project over to the purchase when it is ready for operation for a remuneration like a fixed price , payment on cost plus basis. This form of pricing allows the company to shift the risk of inflation enhanced costs to the purchaser. eg. nuclear power plants , airports, oil refinery , national highways , railway line etc. Hence they are multiyear project

FEATURES:
A firm handles all the details for the host country client. Once the project is completed the host country client is handed the key to the new plant or company. When there are regulations preventing FDI It is also less risky than conventional FDI This mode has the potential to create local competitors When a firm wants to establish a long term presence in a country When a firm's main competitive advantage is knowledge, it may not be the best choice to sell that knowledge to foreign firms

ASSEMBLY OPERATIONS
A manufacturer who wants to take advantages that are associated with overseas manufacturing facilities and yet does not want to go that far may establish overseas assembly facilities in selected markets. It represents a cross between exporting and overseas manufacturing. It is an ideal strategy when there are economies of scale in the manufacture of parts and components and when assembly operations are labour-intensive and labour is cheap in the foreign country.

INTEGRATED LOCAL PRODUCTION OPERATIONS

In order to be competitive in foreign markets, the service provider must have a physical presence in those markets These types of investment are typically seen as the result of differences across countries in input costs Another is the case in which a firm locates a certain labourintensive stage of its production chain in a country with low labour costs, while at the same time locating production stages requiring substantial amounts of human capital in a nation where highly skilled workers are in relatively abundant supply. Transport costs for products with high weight/value ratios may render local production more profitable; that certain products need to be produced in proximity to consumers; that local production makes it easier to adjust to local product standards; and that local production yields better information about local competitors

FULLY OWNED MANUFACTURING

Is a 100% foreign owned subsidiary allowed? Whether FIPB approval is required? Ans: Yes, except in sectors that attract equity cap. The criteria for allowing such investments have been detailed in the guidelines for FIPB consideration. FIPB approval is required if the activity does not fall on the automatic route.

FOREIGN DIRECT INVESTMENT

Meaning Methods By incorporating a wholly owned subsidiary or company anywhere By acquiring shares in an associated enterprise Through a merger or an acquisition of an unrelated enterprise Participating in an equity joint venture with another investor or enterprise Foreign investment was introduced in 1991 under Foreign Exchange Management Act (FEMA), driven by then finance minister Manmohan Singh. Starting from a baseline of less than $1 billion in 1990, a 2012 UNCTAD survey projected India as the second most important FDI destination (after China) for transnational corporations during 20102012. As per the data, the sectors that attracted higher inflows were services, telecommunication, construction activities and computer software and hardware. Mauritius, Singapore, US and UK were among the leading sources of FDI. Based on UNCTAD data FDI flows were $10.4 billion, a drop of 43% from the first half of the last year.

Merits of FDI 1) More consumer savings:. Consumer savings are likely to increase 5 to 10% from FDI. 2) Higher remuneration for farmer: FDI will certain help a lot in improving their conditions as the farmers are going to get 10 to 30 % higher remuneration because of FDI. 3) Increase in employment opportunities: FDI is certainly going to increase the employment opportunities in India by providing around 3 to 4 million new jobs. Not only this another 4 to 6 million jobs will be created in logistics, labour etc. because of FDI. 4) Increase in government revenue Government: revenues are certainly going to increase a lot because of FDI. Government revenues will increase by 25 to 30 billion dollars which is a really big amount

Demerits of FDI 1) Destruction of small entrepreneurs: The biggest fear from FDI is that it is likely to destroy the small entrepreneurs. Eg. Retail Market Fear 2) Shrinking of jobs :Many critics of FDI are of the view that entry of big foreign chains like Wal-Mart, Carrefour etc. are not going to generate any jobs in reality in India. At best the jobs will move from unorganized sector to organized sector while their number will remain the same or lesser but not more. 3) No real benefit to farmers: Critics of FDI are also of the view that it is a fallacy that the farmers are going to benefit in any way because of the entry of foreign chains in India rather it will make the Indian farmers a slave of these big chains & the farmers will entirely be on their mercy. Thus, FDI is only going to deteriorate the already miserable conditions of Indian farmers.

ALLIANCES (MERGERS, ACQUISITIONS, JOINT VENTURES)

Mergers and acquisitions are more popular form of partnerships which is more simple to understand. When one company takes over another and clearly established itself as the new owner, the purchase is called an acquisition. A merger happens when two firms, often of about the same size, agree to go forward as a single new company rather than remain separately owned and operated. For example: Oracle Corporation is very famous for its acquisitions. Oracles acquire companies and not merge with them. Oracle acquired Siebel, BEA, People soft and more recently SUN through friendly or hostile take overs.

Advantages 1. The company immediately gets the ownership and control over the acquired firms factories, employee, technology, brand name and distribution networks. 2. The company can formulate international strategy and generate more revenues. 3. If the industry already reached the stage of optimum capacity level or overcapacity level in the host country. This strategy helps the host country. Disadvantages: 1. Acquiring a firm in a foreign country is a complex task involving bankers, lawyers regulation, mergers and acquisition specialists from the two countries. 2. This strategy adds no capacity to the industry. 3. Sometimes host countries imposed restrictions on acquisition of local companies by the foreign companies. 4. Labour problem of the host countrys companies are also transferred to the acquired company.

JOINT VENTURE
A joint venture is a legal partnership between two (or more) companies where in they both make a new (third) entity for competitive advantage. completely new entity with a board, officers, and an executive team. Effectively a JV is a completely new organization, but owned by the founding participants e.g. Uninor was a joint venture between Unitech (India) and Telenor(France) and KPIT Cummins is a joint venture between KPIT and Cummins Infosystems. In both the above cases, the resulting company is a new independent company with its own set of executives and even name

Advantages 1. Joint venture provide large capital funds suitable for major projects. 2. It spread the risk between or among partners. 3. It provide skills like technical skills, technology, human skills ,expertise , marketing skills. 4. It make large projects and turn key projects feasible and possible. 5. It synergy due to combined efforts of varied parties. Disadvantages: 1. Conflict may arise 2. Partner delay the decision making once the dispute arises. Then the operations become unresponsive and inefficient. 3. Life cycle of a joint venture is hindered by many causes of collapse. 4. Scope for collapse of a joint venture is more due to entry of competitors changes in the partners strength. 5. The decision making is slowed down in joint ventures due to the involvement of a number of parties

STRATEGIC ALLIANCES

An arrangement between two companies that have decided to share resources to undertake a specific, mutually beneficial project. A strategic alliance is less involved and less permanent than a joint venture, in which two companies typically pool resources to create a separate business entity. In a strategic alliance, each company maintains its autonomy while gaining a new opportunity. A strategic alliance could help a company develop a more effective process, expand into a new market or develop an advantage over a competitor, among other possibilities. Example In July 2011, Facebook announced a strategic alliance with Skype, which had been recently acquired by Microsoft. This allowed Microsoft to quickly move into the social networking space, Skype received access to a large number of new users and Facebook could leverage Skype's technology to enable video chat without making the investment in building it.

CONFLICT MANAGEMENT STRATEGIES

There is a menu of strategies we can choose from when in conflict situations: Forcing - using formal authority or other power that you possess to satisfy your concerns without regard to the concerns of the party that you are in conflict with. Accommodating - allowing the other party to satisfy their concerns while neglecting your own. Avoiding - not paying attention to the conflict and not taking any action to resolve it. Compromising - attempting to resolve a conflict by identifying a solution that is partially satisfactory to both parties, but completely satisfactory to neither. Collaborating - cooperating with the other party to understand their concerns and expressing your own concerns in an effort to find a mutually and completely satisfactory solution (win-win).

Matching

Strategies to Situations There are a few key variables that define conflict management situations and determine which conflict management strategies are likely to be effective. Time pressure is an important variable--if there were never any time pressures, collaboration might always be the best approach to use. In addition to time pressures, some of the most important factors to consider are issue importance, relationship importance, and relative power: Issue importance - the extent to which important priorities, principles or values are involved in the conflict. Relationship importance - how important it is that you maintain a close, mutually supportive relationship with the other party. Relative power - how much power you have compared to how much power other party has.

Thank you!