Modes of Entry into International Business¶
International business involves trading goods, services, capital, labor, technology, and intellectual property across national boundaries. It allows countries to balance supply and demand by trading items they have in excess or lack. The entry into international business can be achieved through various modes, each suitable for different business strategies and objectives.
1. Exporting and Importing¶
Exporting refers to selling domestic goods and services to a foreign country, while importing involves buying from foreign entities. These are common initial steps for businesses to engage internationally.
Important Ways to Export and Import:¶
- Direct Importing/Exporting: The company manages all shipping and financial documentation directly with foreign entities.
- Indirect Importing/Exporting: Involves intermediaries who handle the necessary paperwork and negotiations.
2. Contract Manufacturing¶
This mode allows a company to outsource manufacturing to a foreign entity that specializes in production but might lack marketing capabilities. It's a cost-effective strategy often utilized by multinational corporations to produce goods in developing countries. Contract manufacturing is also referred to as international outsourcing.
3. Licensing¶
Licensing involves a company (licensor) allowing another (licensee) to use its brand, patents, or technology under agreed terms. The licensor earns royalties based on sales, which are often capped by local laws in developing countries.
Example: Global beverage brands like Pepsi and Fanta are produced and sold by local companies under licensing agreements.
4. Franchising¶
Franchising grants a franchisee the rights to open and operate a business under the franchisor's brand and operating methods, usually for a fee. This mode is favored by companies with established reputations looking to expand into new markets without significant investment in new outlets.
5. Joint Ventures¶
Joint ventures are formed by two or more companies that collaborate to achieve common goals. This involves sharing resources, risks, and rewards. It's particularly effective in markets where local knowledge and presence are crucial.
Example: The partnership between Maruti (India) and Suzuki (Japan) is a successful joint venture.
6. Wholly Owned Subsidiary¶
A wholly owned subsidiary involves a parent company owning 100% of a foreign subsidiary. This can be established either by setting up a new operation (Green Field Venture) or by acquiring an existing local company. This mode offers complete control over overseas operations.
Each of these entry modes has its own set of advantages and challenges, and the choice depends on the company's strategic goals, resources, and the economic environment of the target market.
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