,-.

/01-21/34561734-1831
934/53847-38:1;<073/00
There are some basic decisions that the firm
must take before foreign expansion like:

Which markets to enter

When to enter those markets

On what scale

r=7>=12-5/7?31@85A/40B
The choice based on nation͛s long run profit potential.

Look in detail at economic and political factors which influence

foreign markets.

-Long run benefits of doing business in a country

depends on following factors:

 Size of market (in terms of demographics)

 The present wealth of consumer markets (purchasing power)

 Nature of competition
 7@73?1-21/3456CD
t is important to consider the timing of entry.

^ntry is early when an international business enters a

foreign market before other foreign firms and late when
it enters after other international business organizations.

The advantage is when firms enters early in the foreign

market commonly known as first mover
Advantage.
£75041@-E/518.E8348?/CD
º. t͛s the ability to prevent rivals and capture demand by
establishing a strong brand name.

2. Ability to build sales volume in that country so that they

can drive them out of market.

3. Ability to create customer relationshipF

ÿ708.E8348?/C

º.Firm has to devote effort, time and expense to learning

the rules of the country.

2.Risk is high for business failure

(probability increases if business enters a national
market after several other firms they can learn from
other early firms mistakes).
,-./01-21/3456CDD
GF1HIJ-5473?

KF1L7>/3073?

MF1£583>=7073?

NF1O<53A/61P5-Q/>4

RF1,/5?/501S1T>U<70747-30

VF1W-7341X/34<5/

YF1T>U<70747-301S1,/5?/50

ZF1r=-::61[\3/.1]<^07.7856
GFHIJ-5473?1C
t means the sale abroad of an item produced ,stored or
processed in the supplying firm͛s home country. t is a
convenient method to increase the sales. Passive
exporting occurs when a firm receives canvassed them.
Active exporting conversely results from a strategic
decision to establish proper systems for organizing the
export functions and for procuring foreign sales.
T.E8348?/01[21HIJ-5473?1C
GF _//.12-51:7@74/.127383>/C
f the company selects a company in the host country to
distribute the company can enter international market with no or
less financial resources but this amount would be quite less
compared to that would be necessary under other modes.

KF1L/001`70A0C

^xporting involves less risk as the company understand the

culture , customer and the market of the host country gradually.
Later after understanding the host country the company can
enter on a full scale.
MF1,-47E847-312-51/IJ-5473?C
|otivation for exporting are proactive and reactive. Proactive
motivations are opportunities available in the host country.
Reactive motivators are those efforts taken by the company to
export the product to a foreign country due to the decline in
demand for its product in the home country
2. L7>/3073?1C
n 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. Here
the manufacturer in the domestic country is called licensor and
the manufacturer in the foreign is called licensee. The cost of
entering market through this mode is less costly. The domestic
company can choose any international location and enjoy the
advantages without incurring any obligations and responsibilities
of ownership ,managerial ,investment etc.
T.E8348?/0C
º. Low investment on the part of licensor.

2. Low financial risk to the licensor.

3. Licensor can investigate the foreign market without much

efforts 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.

ÿ708.E8348?/0C
º. t 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.
MF£583>=7073?C

onder franchising an independent organization called the

franchisee operates the business under the name of another
company called the franchisor under this agreement the
franchisee pays a fee to the franchisor.

The franchisor provides the following services to the franchisee:

º. Trade marks
2. Operating System
3. Product reputation
4. Continuous support system like advertising , employee training
, reservation services quality assurances program etc.
T.E8348?/0C
º. Low investment and low risk.

2. Franchisor can get the information regarding the market

culture, customs and environment of the host country.

3. Franchisor learns more from the experience of the

franchisees.

4. Franchisee get the benefits of R& D with low cost.

5. Franchisee escapes from the risk of product failure.

ÿ708.E8348?/01C
º. t may be more complicating than domestic franchising.

2. t is difficult to control the international franchisee.

3. t reduce the market opportunities for both.

4. Both the parties have the responsibilities to maintain product

quality and product promotion.

5. There is a problem of leakage of trade secrets.

NFO<53A/61P5-Q/>4C

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. ^g:- nuclear
power plants , airports, oil refinery , national highways, railway
line etc. Hence they are multiyear project.
RF,/5?/501S1T>U<70747-30C
A domestic company selects a foreign company and
merge itself with foreign company in order to enter
international business. Alternatively the domestic
company may purchase the foreign company and
acquires it ownership and control. t provides
immediate access to international manufacturing
facilities and marketing network.
T.E8348?/01C

º. The company immediately gets the ownership and control

over the acquired firm͛s factories, employee, technology,
brand name and distribution networks.

2. The company can formulate international strategy and

generate more revenues.

3. f the industry already reached the stage of optimum

capacity level or overcapacity level in the host country. This
strategy helps the host country.
ÿ708.E8348?/0C
º. Acquiring a firm in a foreign country is a complex task
involving
2. bankers, lawyers regulation, mergers and acquisition
specialists from the two countries.

3. This strategy adds no capacity to the industry.

4. Sometimes host countries imposed restrictions on acquisition

of local companies by the foreign companies.

5. Labour problem of the host country͛s companies are also

transferred to the acquired company.
VFW-7341X/34<5/CD
Two or more firm join together to create a new business entity
that is legally separate and distinct from its parents. t involves
shared ownership. Various environmental factors like social ,
technological economic and political encourage the formation
of joint ventures. t provides strength in terms of required
capital. Latest technology required human talent etc. and
enable the companies to share the risk in the foreign markets.
This act improves the local image in the host country and also
satisfies the governmental joint venture.
T.E8348?/0C
º. Joint venture provide large capital funds suitable for major
projects.

2. t spread the risk between or among partners.

3. t provide skills like technical skills, technology, human skills ,

4. expertise , marketing skills.

5. t make large projects and turn key projects feasible and

possible.

6. t synergy due to combined efforts of varied parties.

ÿ708.E8348?/0C

º. 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

5. competitors changes in the partners strength.

6. The decision making is slowed down in joint ventures due to

the involvement of a number of parties.
YFT>U<70747-301S1,/5?/50C
A mergers is a voluntary and permanent combination of business
whereby one or more firms integrate their operations and
identities with those of another and henceforth work under a
common name and in the interests of the newly formed
amalgamations.

,-47E/012-518>U<70747-30C
º. Removal of competitor.
2. Reduction of the Co failure through spreading risk over a wider
range of activities.
3. The desire to acquire business already trading in certain
markets & possessing certain specialist employees & equipments.
4. Obtaining patents, license & intellectual property.
5. ^conomies of scale possibly made through more extensive
operations.

6. Acquisition of land, building & other fixed asset that can be

profitably sold off.

7. The ability to control supplies of raw materials.

8. ^xpert use of resources.

9. Tax consideration.

º .Desire to become involved with new technologies &

management method particularly in high risk industries.
ZFr=-::61[\3/.1]<^07.7856CD
Subsidiary means individual body under parent body. This
Subsidiary or individual body as per their own generates revenue.
They give their own rent, salary to employees, etc. But policies
and trademark will be implemented from the Parent body. There
are no branches here. Only the certain percentage of the profit
will be given to the parent body.

A subsidiary, in business matters, is an entity that is controlled by

a bigger and more powerful entity. The controlled entity is called a
company, corporation, or limited liability company, and the
controlling entity is called its parent (or the parent company).
The most common way that control of a subsidiary is achieved is
through the ownership of shares in the subsidiary by the parent.
These shares give the parent the necessary votes to determine
the composition of the board of the subsidiary and so exercise
control. This gives rise to the common presumption that 5

plus one share is enough to create a subsidiary. There are,
however, other ways that control can come about and the exact
rules both as to what control is needed and how it is achieved
can be complex (see below). A subsidiary may itself have
subsidiaries, and these, in turn, may have subsidiaries of their
own. A parent and all its subsidiaries together are called a group,
although this term can also apply to cooperating companies and
their subsidiaries with varying degrees of shared ownership.
Subsidiaries are separate, distinct legal entities for the purposes
of taxation and regulation. For this reason, they differ from
divisions, which are businesses fully integrated within the main
company, and not legally or otherwise distinct from it.

Subsidiaries are a common feature of business life and most if

not all major businesses organize their operations in this way.
^xamples include holding companies such as Berkshire Hathaway,
Time Warner, or Citigroup as well as more focused companies
such as B|, or Xerox Corporation. These, and others, organize
their businesses into national or functional subsidiaries,
sometimes with multiple levels of subsidiaries.
 Phases of ndian ^conomy
º99º-2
 Liberalization and Globalization of ndian
^conomy
ncreased emphasis on private sector participation
Limited extent of FD participation
Gradual improvement in the enabling
environment

29
 Phases of ndian ^conomy
post 2
 Political Coalitions have started providing
stable governments
 Government to get out of owning and
managing businesses: Disinvestment Policy
 Gradual relaxation in the FD Policy

3
 Progressive Liberalisation
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Luthra & Luthra Law Offices 3º
 Present Picture
 ndia: Fourth largest economy in terms of Purchasing
Power Parity
 Tenth most industrialized economy
 GDP growth rate of 8.º
- Second highest in the world.
 Considerable improvement in FD inflows
 F inflows:
For the period, July 2 3 ʹ Jan 2 4 F inflow has exceeded
oSD 7 bn, which is more than the cumulative F inflow in the
last five years.
 Still a big gap between ndia and China

Luthra & Luthra Law Offices 32

H34561P5->/001S1H34561
]4584/?7/0193193.781

Luthra & Luthra Law Offices 33


The ^ntry Process
nvesting in ndia

Automatic Route Prior Permission

6
 O


ânform RB within 3 days of Approval of Foreign
inflow/issue of shares nvestment Promotion
â Pricing: F^|A Regulations Board needed.
âonlisted ʹ CC Decision generally
âListed ʹ S^B within 4-6 weeks
â Cap of Rs. 6 Crore
( ]aÿ1KKK1@7::7-3b
Luthra & Luthra Law Offices 34
The ^ntry Process: Automatic Route
 All items/activities for FD investment up to º
fall
under the Automatic Route except the following:
All proposals that require an 93.<04578: L7>/3>/.
All proposals in which the 2-5/7?3 >-::8^-584-5 has a
J5/E7-<0 E/34<5/c 47/ <J 73 93.78.
All proposals relating to acquisition of /I70473? 0=85/0 in
an existing ndian Company by a foreign investor.
All proposals falling -<407./ 3-4727/. 0/>4-58: J-:7>6c >8J0
or under sectors in which FD is not permitted.

Luthra & Luthra Law Offices 35

 The ^ntry Process: Government
Approval
£
 
 For all activities, which are not covered
under the Automatic Route
 Composite approvals involving foreign
investment/ foreign technical collaboration
 P<^:70=/. O5830J85/34 a<7./:73/0 

H85:7/5 d80/ ^6 d80/ TJJ5-8>=
 Downstream nvestment
Luthra & Luthra Law Offices 36
 The ^ntry Strategy

 Forms in which Business can be conducted in

ndia
 Wholly owned subsidiary
 Joint Venture Company
 Branch Office
 Project Office
 ndia Presence: Liaison Office

Luthra & Luthra Law Offices 37

 The ^ntry Strategy: Joint Venture
Company
 T.E8348?/0
Limited liability
|arket Penetration
Local Partner͛s ^xpertise and ^xperience
 X748: d-307./5847-30
Choice of Joint Venture Partner
Due Diligence

Luthra & Luthra Law Offices 38

 The ^ntry Strategy: Joint Venture
Company
 X748:1d-307./5847-30 (Contd.)
Clearly defined agreement
O/5@0 -2 4=/ ]=85/=-:./50e T?5//@/34 0=-<:. ^/
5/2:/>4/. 73 4=/ T547>:/0 -2 4=/ d-@J836F
]=85/ O58302/5 `/0457>47-3 73 8 P<^:7> L7@74/.
d-@J836
ÿ70J5-J-547-384/ E-473? `7?=40C X/4-
Non-compete

Luthra & Luthra Law Offices 39

 The ^ntry Strategy: Joint Venture
Company

 X748:1d-307./5847-30 (Contd.)
Agreement for future issue of share capital
ÿ70J<4/ `/0-:<47-3
Non-disclosure of confidential information post
termination

Luthra & Luthra Law Offices 4

 The ^ntry Strategy: Branch Office

 Purpose/Viability of a Branch Office

Represent the business interest of foreign
company
For the purpose of execution of the Project
 Project Office is in the nature of a Branch
Office set up for a particular project.

Luthra & Luthra Law Offices 4º

The ^ntry Strategy: Branch Office
 Permissible activities for a Branch
Office
HIJ-54c9@J-54 of goods
P5-2/007-38: -5 d-30<:483>6 ]/5E7>/0
Carrying out 5/0/85>= \-5A in which the parent
company is engaged
P5-@-473? 4/>=37>8: -5 27383>78: >-::8^-5847-30
between ndian Companies and parent or
overseas group companies

Luthra & Luthra Law Offices 42

 The ^ntry Strategy: Branch Office

 P/5@7007^:/ 8>47E747/0 (Contd.)

Representing the parent company in ndia and
acting as ;<673? 83. ]/::73? T?/34
Rendering O/>=37>8: ]<JJ-54 to the products
supplied by parent/group companies.
Foreign Airlines/ Shipping Companies
 900</C P5-Q/>4c ;583>= [227>/ f P/5@83/34
H048^:70=@/34

Luthra & Luthra Law Offices 43

 The ^ntry Strategy: Liaison Office
 Liaison office for
P5-@-47-3 -2 ^<073/00 734/5/04Ú spreading
awareness of company͛s productsÚ explore
opportunitiesÚ work as channel of
communication etc.
d833-4 >8556 -3 836 >-@@/5>78:g 458.73? -5
73.<04578: 8>47E746 -5 /853 836 73>-@/ 73 93.78
s required to maintain itself out of inward
remittances received from abroad through
normal banking channels.

Luthra & Luthra Law Offices 44

 The ^ntry Strategy

 Branch Office/Liaison Office can be set up

only with J57-5 `;9 8JJ5-E8:
 P5-274 of the Branch or ]<5J:<0 of the project
after completion can be remitted, after
payment of all applicable taxes in ndia

Luthra & Luthra Law Offices 45

93E/04@/34193>/347E/0

Luthra & Luthra Law Offices 46

 nvestment ncentive for
T ndustry
 Software companies have a 4/3 6/85 48I =-:7.86
on their export income
 n º998 the Government set up a new |inistry of
nformation Technology
 The nformation Technology Act, 2 was
passed to tackle cyber crimes and facilitate e-
commerce

Luthra & Luthra Law Offices 47

 ncentives for nvestment in Power
Sector
 New Legal Regime: ^lectricity Act, 2 3
 The Act provides for: |ultiple Buyer |odel,
ndependent Regulatory Body, Open Access,
Power Trading as an independent business,
delicensing of generation
 º
FD Automatic Route in:
Hydro-electric power plantsÚ
Coal/lignite based thermal power plantsÚ
Oil/gas based thermal power plants.

Luthra & Luthra Law Offices 48

 FD in Hotel and Tourism:Policy and
ssues
 º
FD under Automatic Route
 ͞Hotel͟ includes Restaurant, beach resorts and other tourist
complexes providing accommodation and/or Catering
 ͞Tourism related industries͟ includes travel agencies, tour
operating agencies, units providing facilities for cultural,
adventure and wild life experience to touristsÚ surface, air and
water transport facilities to touristsÚ leisure, entertainment,
amusement, sports and health units for tourists and
Convention/ Seminar units and organizations.
 Automatic approval for Technical, Consultancy, |arketing,
Publicity, |anagerial services subject to specified limits.

Luthra & Luthra Law Offices 49