Unit-4

Modes of Entering
Global Business
Contents

 Global business expansion modes.

 Licensing, Franchising, Management Contract, Trunkey Projects,
International Leasing, Joint Ventures, Mergers & Acquisitions,
Strategic Alliance.
 Foreign Direct Investment ( FDI): Concept & Techniques of FDI
Global Business expansion Modes

1. Trade Related Expansion Modes

2. Contractual Modes of Entry
3. Investment Modes of Entry
1. Trade RELATED Expansion
Modes:
Expansion modes that employ some form of trade to expand business in foreign
countries are known as trade related modes. As financial needs and resource
commitments are less, low risk expansion modes, highly suitable for
simultaneous expansion in geographically diverse countries, trade related
modes are adopted in the initial phases of internationalization. Moreover, the
low exit cost adds flexibility of winding up business operations in one country
and switching over to another. However, a firm has to substantially depend upon
external agencies for its International expansion.
a) Exporting:
Exporting may be defined as manufacturing of goods in one country and selling
them in the country other than the country of production. It is a typically the
easiest way to enter an international market, and therefore most firms begin
their international expansion using this model of entry. The advantage of this
mode of entry is that firms avoid the expense of establishing operations in the
new country. The firms must have the distribution channels in to get their
products/ services to be sold in the new country by have contractual
agreements with local company of distributors.
1. Trade RELATED Expansion
Modes: (Contd.)
Types of Exporting:
i) Direct exporting:
Direct exporting is a type of exporting where the company directly sells products
to overseas customers. All the deals are done directly between the companies
without any intermediaries. The companies have more control over the processes.
The firm is typically involved in handling documentation, physical delivery and
pricing policies, with the products being sold to final clients. No involvement of
third party/ middlemen.

However, direct exporting also demands more resources from the exporting
company. It requires more personnel, resources, and time than it would if the
export process were to happen through an intermediary.
1. Trade RELATED Expansion
Modes: (Contd.)
Types of Exporting (contd.):
ii) Indirect exporting:
Indirect exporting is a type of exporting practiced by companies that sell
products to other countries with the help of an intermediary. The company has
various intermediaries, such as foreign agents, export merchants, expert
management companies, etc. Here, businesses have lesser control over the
processes. The intermediaries are present in the country producing the product.
They are responsible for sending the products to the customer's country and
finishing all the paperwork, transport, and marketing. The first intermediary may
sell directly to the customer or the customer's intermediary.
The main disadvantage of indirect exporting is the transfer of power to the
intermediaries. As a result, companies may lose the opportunity to build long-
term relationships and offer after-sales services to customers.
1. Trade RELATED Expansion
Modes: (Contd.)
Types of Exporting (contd.):
iii) Cooperative exporting:
This involves collaborative agreements with other firms (export marketing groups)
concerning the performance of exporting functions.

b) Piggy Backing:

Piggybacking in international business refers to a strategy where a company enters a

new market by leveraging the existing infrastructure, distribution channels, or
reputation of another company. This can include forming partnerships or joint ventures
with local companies, licensing agreements, or even acquiring established businesses.
The idea is to take advantage of the established company's existing resources,
relationships, and knowledge of the market to reduce the risks and costs of entering a
new market.
1. Trade RELATED Expansion
Modes: (Contd.)
b) Piggy Backing: (contd.)

Piggyback is a form of distribution in foreign markets in which a SME company

(the “rider”), deals with a larger company (the “carrier”) which already operates
in certain foreign markets and is willing to act on behalf of the rider that whishes
to export to those markets. This enables the carrier to utilize fully its established
export facilities (sales subsidiaries) and foreign distribution. The carrier is either
paid by commission and so acts as an agent or, alternatively, as an independent
distributor buying the products.
Advantages:
 Reduced Risk
 Cost Savings
 Increased Credibility
 Speed to Market
1. Trade RELATED Expansion
Modes: (Contd.)
b) Piggy Backing: (contd.)
Disadvantages:
 Limited control
 Dependence on the established company
 Limited differentiation
 Cultural and operational differences

c) Counter Trading:
Countertrade is a reciprocal form of international trade in which goods or
services are exchanged for other goods or services rather than for hard
currency. This type of international trade is more common in developing
countries with limited foreign exchange or credit facilities
1. Trade RELATED Expansion
Modes: (Contd.)
c) Counter Trading: (contd.)
Countertrade can be classified into three broad categories:
 Barter
 Counter-purchase (refers to the sale of goods and services to a company in a
foreign country by a company that promises to make a future purchase of a specific
product from the same company in that country.
 Offset (is a countertrade agreement in which a company offsets a hard currency
purchase of an unspecified product from that nation in the future.
 Compensation Trade (is a form of barter in which one of the flows is partly in goods
and partly in hard currency.)
 Buyback (is a countertrade occurs when a firm builds a manufacturing facility in a
country—or supplies technology, equipment, training, or other services to the
country and agrees to take a certain percentage of the plant's output as
partial payment for the contract.)
1. Trade RELATED Expansion
Modes: (Contd.)
d) E- channels:

Electronic Channels means the electronic technologies by which

the Company voluntarily offers its services, including but not
limited to: Internet websites, programs run on computers or other
electronic devices, telephone and fax, IVR, communication
devices, or any other electronic technique by which the Company
can offer its services.

“Use of Internet”. (Grabbing international consumer through

electronic platform). E.g. Amazon, Alibaba, and so on.)
1. Trade RELATED Expansion
Modes: (Contd.)

d) E- channels: (contd.)
2. Contractual Modes of Entry

These types of entry modes consist of several similar but get

different contractual arrangements between the firms form the
domestic market and the company that licenses the intangible
assets in the foreign market.
This includes licensing, franchising, technical agreements, service
contracts, management contracts, construction/turnkey contracts,
co- production contracts and other.
The objective is to enhance the long-run competitiveness for the
partners in the alliance and it is built on the belief that each party
has something unique to contribute to the partnership.
2. Contractual Modes of Entry
(contd.)
a) Turnkey Project:
 The contractor agrees to handle every detail of the project for a foreign
client including the training of operational personnel.
 At the completion of the contract, the foreign client is handed the key to a
plant that is ready for full operation.
 Conceptually, ‘turnkey’ means’ handing over a project to the client, when it
is complete in all respect and is ‘ready to use’ on ‘turning the key’.
 It is very common in the chemical, pharmaceutical and petroleum refining
industries.
 Includes conceptualizing, designing, constructing, installing, and carrying
out preliminary testing of manufacturing facilities or engineering projects at
overseas locations for a client organization.
2. Contractual Modes of Entry
(contd.)
a) Turnkey Project (contd.):
Types of Trunkey Project:
i. Build and Transfer (The firm conceptualizes designs, builds, carries out primary
testing, and transfers the project to the owner. Important issues negotiated with
the overseas firm include design specifications, price, make and source of
equipment, man specifications, performance schedules, payment terms, and
buyer’s support system
ii. Build, Operate, and Transfer (The internationalizing firm not only builds the
project but also manages it for a contracted period before transferring it to the
foreign owner. The exporting company needs additional resources and
competence to run such a project.)
iii. Build, Operate, and Own (The internationalizing firm is expected to buy the
project once it has been built, which results in foreign direct investment after a
certain time period. The exporting company has to be highly integrated,
providing technical and management services, besides having experience in
owning and controlling infrastructure projects.)
2. Contractual Modes of Entry (contd.)
a) Turnkey Project (contd.):
 The advantages of this mode of entry is earning great returns from
the asset.
 The strategy is particularly useful where FDI is limited by host-
government regulations.
 Less risky than FDI.
 However, a firm enters into turnkey deals with no long-term interest
in the foreign country.
 A firm entering in this way heedlessly creates competitors.
 If the firm’s process technology is a source of competitive
advantage, then selling this technology through a turnkey project is
also selling competitive advantage to potential or actual competitors.
 Example: Nokia and BSNL collab.
2. Contractual Modes of Entry (contd.)
b) International Leasing:
 A firm can expand its business by leasing out new and used equipment to a
manufacturing firm.
 The ownership of the property retains with the leasing firm (i.e., lessor)
throughout the lease period during which the foreign-based user (i.e., lessee)
pays leasing fee.
 Provides international business opportunities by rapid market access using
idle and obsolete equipment in an efficient manner.
 Benefits low- income country-based manufacturers to reduce cost of getting
machinery and equipment from overseas and reduces investment and
operational risks.
 International Lease Finance Corporation (ILFC)-Los Angeles, leases aircrafts to
airlines worldwide, such as Emirates, Lufthansa, Air France, KLM, American
Airlines, Continental, Vietnam Airlines, etc.
2. Contractual Modes of Entry (contd.)
c) International Licensing:
 A firm makes its intangible assets, such as patents, trademarks and
copyrights, technical know-how and skills (technical guidance, feasibility
and product studies, manuals, engineering, designs, etc.) available to a
foreign company for a fee termed as royalty.
 The home-based firm transferring the intellectual property is known as the
licensor whereas the foreign based firm is known as licensee.
 The licensee makes use of these intangible assets in production
processes.
 Serves as a powerful tool for international expansion with little financial
commitment.
 Common in pharmaceuticals, toys, machine tools, publishing, etc.
 Licensing is often adopted in view of environmental factors. (entry
barriers, to curb counterfeiting, small markets)
2. Contractual Modes of Entry (contd.)
d) International Franchising
 Franchising has been widely used as a rapid method of international
expansion.
 Is similar to licensing, but franchising tends to involve long terms
commitments than licensing.
 Here, the franchiser not only sells intangible property to the franchisee
but also insists that the franchisee agree to concede to rules and
regulations of how it does business.
 The franchiser receives the royalty from the franchisee’s revenue at an
agreed rate.
 The entry into market via Franchising is of low cost and low risk.
 The goodwill of the business is already established by the franchiser.
 However, there is a problem of adapting the franchised asset or brand to
the local tastes.
2. Contractual Modes of Entry (contd.)
e) Management Contract:
 The international management contract gives the company the right to
control the day-to- day operations in a firm located in a foreign market.
 Often this contract do not give them the right to take decisions on new
capital investment, policy changes, assume long-term debt or alter
ownership arrangement.
 When a manufacturer want to enter a management contract they seldom
do so isolated from other arrangements.
 Management contract is a type of business contract that outlines the
responsibilities of a manager in operating and managing an organization on
behalf of another party.
2. Contractual Modes of Entry (contd.)
f) Contract Manufacturing:
 Contract manufacturing is a type of international business, in which a firm
enters into a contract with another firm in a foreign country to manufacture
certain components or goods as per its specifications.
 Here, the company is specialized in the manufacturing process but lacks
marketing skills, whereas the other company, due to its established
reputation, is capable of selling those items and services.
 Offering these items and services is not the primary business of these
organizations, but they do it for the benefit of their name and reputation,
as well as to provide high-quality products at a low cost to their customers.
 Maybelline, Loreal, Levis, and others use contract manufacturing to have
their products or component parts produced in developing nations.
 Also known as International Outsourcing
3. Investment Modes of Entry
 Investment entry modes are about acquiring ownership in a
company that are located in the foreign market.
 The activities within this category involve ownership of
production units or other facilities in the overseas market,
based on some sort of equity investment.
 The companies want to have ownership in some or all of their
international ventures.
 This can be achieved by joint ventures (equity based),
acquisitions, green-field investment.
 Investors who follow growth strategies should be watchful of
executive teams and news about the economy.
3. Investment Modes of Entry (contd.)
a) Joint Ventures:
 A joint venture is a contractual arrangement whereby a separate entity is
created to carry on trade or business on its own, separate from the core
business of the participants.
 It occurs when new organizations are created, jointly owned by both
partners.
 One of these partners must be from another country than the rest and the
location of the company must be outside of at least one party’s home
country.
 Companies forming a joint venture will often partner with one of its
customers, vendors, distributors, or even one of its competitors.
 These businesses agree to exchange resources, share risks, and divide
rewards from a joint enterprise, which is usually physically located in one
of the partners’ jurisdictions.
3. Investment Modes of Entry (contd.)

a) Joint Ventures (contd.):

 Joint venture is an equity entry mode.
 The local joint venture partner will frequently supply physical space,
channels of distribution, sources of supply, and on-the ground knowledge
and information.
 The other partner usually provides cash, key marketing personnel, certain
operating personnel, and intellectual property rights.
 Ownership of the venture may be 50% for each party, or may be other
proportions with one party holding the majority share.
 When multiple partners participate in the joint venture, the venture maybe
called a “consortium”.
3. Investment Modes of Entry (contd.)
3. Investment Modes of Entry (contd.)
Joint Ventures (contd.):
Advantages:
 Joint venture makes faster access to foreign markets.
 The local partner to the joint venture may have already established itself in
the marketplace and often will have already obtained, or have access to,
government contacts, lines of credit, regulatory approvals, scarce supplies
and utilities, qualified employees, and cultural knowledge.
 The non-resident partner has access to the local partner’s pre-established
ties to the local market.
 A firm might gain by sharing these costs and/or risks with a local partner.
 The reputation of the resident partner gives the joint venture credibility in
the local marketplace, especially with existing key suppliers and
customers.
3. Investment Modes of Entry (contd.)
Joint Ventures (contd.):
Disadvantages:
 Shared ownership can lead to conflicts and battles for control if goals and
objectives differ or change over time.
 Can foreclose other opportunities for entry into a foreign marketplace.
 It can be difficult for a joint venture to independently obtain financing,
particularly debt financing.
 A firm that enters into a joint venture risks giving control of its technology
to its partner and there is the possibility you might wind up turning your
own joint venture partner into a competitor.
3. Investment Modes of Entry (contd.)
b) Merger and Acquisition:
 Merger requires two companies to consolidate into a new entity with a
new ownership and management structure (ostensibly with members of
each firm).
 Mergers require no cash to complete but dilute each company's
individual power.
 Friendly mergers of equals do not take place very frequently.
 Mergers are done to reduce operational costs, expand into new markets,
boost revenue and profits.
 Mergers are usually voluntary and involve companies that are roughly
the same size and scope.
3. Investment Modes of Entry (contd.)
b) Merger and Acquisition:
 In acquisition, the smaller company is often consumed and ceases to
exist with its assets becoming part of the larger company.
 Acquiring companies may refer to an acquisition as a merger even
though it's clearly a takeover.
 Acquisitions require large amounts of cash, but the buyer's power is
absolute.
 Companies may acquire another company to purchase their supplier and
improve economies of scale–which lowers the costs per unit as
production increases.
 Companies engage in acquisitions to obtain the technologies of the
target company, which can help save years of capital investment costs
and research and development.
3. Investment Modes of Entry (contd.)
3. Investment Modes of Entry (contd.)
3. Investment Modes of Entry (contd.)
c) Strategic Alliance:
 A strategic alliance is an arrangement between two companies to
undertake a mutually beneficial project while each retains its
independence.
 To expand into a new market, improve its product line, or develop an
edge over a competitor, companies enter into strategic alliances.
 The arrangement allows two businesses to work toward a common
goal that will benefit both.
 Strategic alliances allow two organizations, individuals or other
entities to work toward common or correlating goals.
 Strategic alliances can be Marketing Alliance, Promotional Alliance,
Logistic Alliance and Collaborations (financial means to develop new
technologies)
3. Investment Modes of Entry (contd.)
c) Strategic Alliance (contd.):
Advantages:
 Increased leverage – Strategic alliances allow you to gain greater
results from your company’s core strengths.
 Risk sharing – A strategic alliance with an international company
will help to offset your market exposure and allow you to jointly
exploit new opportunities.
 Opportunities for growth – Strategic alliances can create the means
by which small companies can grow.
 Greater responsiveness – By allowing you to focus on developing
your core strengths, strategic alliances provide the ability to
respond more quickly to change and opportunity.
3. Investment Modes of Entry (contd.)
c) Strategic Alliance (contd.):
Disadvantages:
 High commitment — time, money, people.
 Difficulty of identifying a compatible partner.
 Potential for conflict between the partners.
 A small company risks being subsumed by a larger partner.
 Strategic priorities change over time.
 Political risk in the country where the strategic alliance is based.
 If the relationship breaks down, the cost/ownership of market
information, market intelligence and jointly developed products
can be an issue.
3. Investment Modes of Entry
(contd.)
d) Foreign Direct Investment:
 FDI is generally used to describe a business decision to acquire a
substantial stake in a foreign business or to buy it outright to expand
operations to a new region.
 FDI is a key element in international economic integration because it
creates stable and long-lasting links between economies.
 FDI investors typically take controlling positions in domestic firms or
joint ventures and are actively involved in their management.
 The investment may involve acquiring a source of materials,
expanding a company’s footprint, or developing a multinational
presence.
 FDI can be categorized as Green Field Investment and Brown Field
Investments.
3. Investment Modes of Entry
(contd.)
d) Foreign Direct Investment (contd.)
Types of FDI:
 Horizontal FDI: (A company establishes the same type of business
operation in a foreign country as it operates in its home country.)
 Vertical FDI: (A business acquires a complementary business in
another country. )
 Conglomerate FDI: (A company invests in a foreign business that is
unrelated to its core business. Because the investing company has no
prior experience in the foreign company’s area of expertise, this often
takes the form of a joint venture.)
3. Investment Modes of Entry
(contd.)
Thank you!!