Chapter 6 - MODES OF ENTERING INTERNATIONAL BUSINESS

Introduction
The market for a number of products tends to saturate or decline in the advanced countries.
This often happens when the market potential has been almost fully tapped. In the United States,
for example, the number of several consumer durables like cars, TVs etc. is almost equal to the
total number of household. Further the technological advances have increased the size of the
optimum scale of operation substantially in many industries making it necessary to have foreign
market, in addition to domestic market to take advantage of scale economies. Again when the
domestic market is very small, internationalization is the only way to achieve significant growth.
Why firms go international?
 Profitability
 Growth
 Economies of Scale
 Access to resources
 Marketing opportunities
 USP of product and services
One of the greatest product and outcome of globalization. It serves as an avenue of every
risk taker all over the world to explore different industries in the aspect of business.

Modes of Entering International Business

1. Exporting. It is the process of selling goods and services produced in one country to another
country. Exporting maybe direct or indirect
Direct Export. The organization produces their product in their home market and then
sells them to customers overseas.
Indirect Export. The organizations sell their product to a third party who then sells it on
within the foreign market.
The term “export” is derived from the conceptual meaning as to ship the goods and services
out of the port of a country. The seller of such goods and services is referred to as an “exporter”
who is based in the country of export whereas the overseas based buyer is referred to as an
“importer”. In International Trade, “exports” refers to selling goods and services produced in home
country to other markets.
There are a number of factors were important in contributing to successful exporting:
 commitment of the firms’ management
 an exporting approach in the firm which emphasized the importance of augmenting and
maintaining skills
 a good marketing information and communication system
  sufficient production capacity and capability, product superiority and competitive pricing
 effective market research to reduce the psychic distance between the home country and
target country market given that it is knowledge that generates business opportunities and
drives the international process
 an effective national export policy which provides support at an individual firm level,
and emphasizes the need for knowledge-based programs which prioritize market
information about foreign market opportunities.

Selection of Exporting Method

Agents. Agents provide the most common form of low cost direct involvement in foreign
markets and are independent individuals or firms who are contracted to act on behalf of exporters
to obtain orders on a commission basis. They typically represent a number of manufacturers and
will handle non-competitive ranges. As part of their contract they would be expected to agree sales
targets and contribute substantially to the preparation of forecasts, development of strategies and
tactics using their knowledge of the local market.
The selection of suitable agents or distributors can be a problematic process. The selection criteria
might include:
 The financial strength of the agents.
 Their contacts with potential customers.
 The nature and extent of their responsibilities to other organisations.
 Their premises, equipment and resources, including sales representatives.

Distributors. Agents do not take ownership of the goods but work instead on commission,
sometimes as low as 2-3 per cent on large volume and orders. Distributors buy the product from
the manufacturer and so take the market risk on unsold products as well as the profit. For this
reason, they usually expect to take a higher percentage to cover their costs and risk.
Distributors usually seek exclusive rights for a specific sales territory and generally
represent the manufacturer in all aspects of sales and servicing in that area. The exclusivity,
therefore, is in return for the substantial capital investment that may be required in handling and
selling the products. The capital investment can be particularly high if the product requires special
handling equipment or transport and storage equipment in the case of perishable goods, chemicals,
materials or components.
Direct Marketing. Direct marketing is concerned with marketing and selling activities
which do not depend for success on direct face-to-face contact and include mail order, telephone
marketing, television marketing, media marketing, direct mail and electronic commerce using the
Internet. There is considerable growth in all these areas largely encouraged by the development of
information and communication technology, the changing lifestyles and purchasing behavior of
consumers and the increasing cost of more traditional methods of entering new markets.

2. Licensing and Franchising.

In International Licensing, the Licensor will grant an organization in the foreign market a
license to produce the product, use the brand name etc. in return that they will receive a royalty
payment.
Pros:
 law financial risks
 low cost way to assess market potential
 avoid tariffs, NTBs, restrictions on foreign investment
 licensee provides knowledge of local markets

Cons:
 limited market opportunities
 dependence on licensee
 possibility of creating future competitor
International Franchising is another form of licensing. Here the organization puts together a
package of the ‘successful’ ingredients that made them a success in their home market and then
franchise this package to overseas investors.
 (Franchising; McDonalds, Subway, 7/11, Dunkin Donuts)
 (Licensing; companies using the designs of popular character ex. Mickey Mouse)
3. Partnering and Strategic Alliance. It involves a contractual agreement between two or more
enterprises stipulating that the involved parties will cooperate in a certain want for a certain time
to achieve a common purpose.
Pros:
 proven products and services
 proven trade mark
 reduced risk of failure

Cons:
 Does not provide experiential knowledge in foreign markets
 high potential for opportunism
 high monitoring costs
Partners are especially valuable if they have recognized, reputable brand name in the country
or have existing relationships with customers that the firm might want to access.
  (1.Ford and Eddie Bauer; Ford Explorer Eddie Bauer Edition, 2. Spotify and Uber;
Premium Service vs. Opportunity of riders to listen, 3. Google and Luxottica; Premium
Quality Eyeware vs. Technology)
4. Acquisition.
An acquisition is a transaction in which a firm gains control of another firm by purchasing
its stock, exchanging the stock for its own, or, in the case of a private firm, paying the owners a
purchase price.
 (1. Disney & Pixar/Marvel, 2. Google & Android, 3. Exxon & Mobile)
5. New, Wholly Owned Subsidiary.
The process of establishing of a new, wholly owned subsidiary (also called a greenfield
venture). The firm may have to acquire the knowledge and expertise of the existing market by
hiring either host-country nationals—possibly from competitive firms—or costly consultants.63
An advantage is that the firm retains control of all its operations.
 (1. AUDI AG: AUDI, Bently, Bugatti, Lamborghini, Volkswagen, 2. WALT DISNEY
COMPANY: Marvel Entertainment & EDL Holding Company LLC)
6. Turnkey project
- Is a contract under which a firm agrees to fully design, construct and equip a
manufacturing /business/service facility and turn the project over to the purchaser when it is ready
for operation, for remuneration. The company hires a contractor in the desired country that they
want to create an operation. At the completion of the contract, the foreign company gives the “key”
to the project and it is ready for operation.
Pros:
 focus firm’s resources on its area of expertise
 avoid all long term operational risk

Cons:
 financial risks
 cost overruns
 construction risk
 problems with suppliers
7. Management contract
- Is an agreement between two companies whereby one company provides managerial
assistance, technical expertise and specialized services to this second company for a certain period
of time in return for monetary compensation. Most management contracts provide for training of
local personnel who will eventually take over the management responsibilities.
Pros:
  focus firm’s resources on its area of contracts
 minimal financial exposure

Cons:
 potential returns limited by contract expertise
 may unintentionally transfer proprietary knowledge and techniques to contractee
8. Specialized entry modes
– Management contract, turnkey projects, and contract manufacturing are known as
specialized entry modes. It called special because the activities included on them contains short
term investment, less litigation risks, less exposure to financial risks, compared to other sorts of
entry modes.
9. Foreign Direct Investment.
Through investment. Investment may be direct or indirectly through Financial Institutions.
The extent to which FDI is allowed in a country is subjected to the government regulations of that
country. It can be done by purchasing shares of a company, property and assets.
Outsourcing is defined as a cost effective strategy used by companies to reduce costs by
transferring portions of work to outside suppliers rather than completing it internally. It includes
both domestic and foreign contracting and also off shoring (relocating a business function to
another country).
Contract Manufacturing is when a foreign firm hires a local manufacturer to produce
their product or a part of their product. This method utilizes the skills of a local manufacturer and
helps in reducing cost of production. The marketing and selling of the product is the responsibility
of the international firm.  (BRITECH INDUSTRIES; custom rubber products, MAXSTEEL
INDUSTRIES LLC; complex sheet metal fabrication).

E-Business
“A consumer visits a bookstore and inquires about the availability of an out-of-stock book.
A bookstore employee downloads a digital copy of the book and prints it along with cover. Not an
e-commerce retail transaction since agreement to purchase did not occur over an electronic
network. However, the right to access the digital archived copy is an e-commerce service
transaction.”
E-commerce is a selling and transfer process requiring several institutes. It is systematic
and organised network for the exchange of goods between produces and consumers. The Net aims
to establish the interconnections between producers and consumers directly and in this, the Internet
embraces all those related activities which are indispensable for maintaining a continuous, free
and uninterrupted distribution and transfer of goods. The Website or portals may be categorised
into commercial and non-commercial.
 Any web site or portal that offers products and/or services for sale is a commercial web
site. There are thousands of commercial web sites on the Internet. Some of them have been
successful, and some weren’t so lucky. What elements make up a good commercial web site? Of
course, web pages should look attractive to a customer. However, even the most attractive web
pages will not make a person come back to a web site where it takes too long to find the right
product or where order forms don’t work.

E-BUSINESS
 It is short for “electronic business”.
 It refers to any method of utilizing digital information & communication and
communication technologies to support or streamline business processes – from
preparation to implementation. However, it can also refer more specifically to the business
processes of online stores or other internet-based companies.
 It is the conduct of business processes on the internet. These e-business processes include
buying and selling goods and services, servicing customers, processing payments,
managing production control, collaborating with business partners, sharing information,
running automated employee services, recruiting and more.
 Can comprise a range of functions and services. They range from the development of
intranets and extranets to the provision of e-services over the internet by application service
providers.
Concept of E-Business and E-Commerce
E-business
- covers not only the online transactions, but also extends to all Internet-based
interactions with business partners, suppliers and customers such as: selling direct to
consumers, manufacturers and suppliers; monitoring and exchanging information;
auctioning surplus inventory; and collaborative product design. These online
interactions are aimed at improving or transforming business processes and efficiency.
E-commerce
- is a general concept covering any form of business transaction or information exchange
executed using Information and Communication Technologies (ICT’s). E-commerce
takes place between companies, between companies and their customers, or between
companies and public administration. E-commerce includes electronic trading of both
goods and services.
- “E-commerce denotes the use of electronic transmission media (telecommunication) to
engage in the exchange of products and services requiring transportation either
physically or digitally, from location to location”. M. Greenstein and T. M. Feinman.
- “E-commerce describes the process of buying and selling (or exchanging) of products,
services and information via computer networks including the internet”. E. Turban.
 - E-commerce is the means to complete online transaction and integrate the supply chain
into the transaction management process such as receiving orders, making payments
and tracking down the deliveries or order.
- “E-commerce can be defined as the technology-mediated exchanges between parties
(individuals, organisations, or both) as well as the electronic based intra or inter
organisational activities that facilitate such exchanges”. J. F. Rayport and B. I. Jaworsk.
- E-commerce as a commercial process includes production, distribution, marketing, sale
or delivery of goods and services electronically (According to World Trade
Organization (WTO)).

Examples of e-commerce transactions are:

 An individual purchases a book on the Internet.
 A government employee reserves a hotel room over the Internet.
 A business calls a toll free number and orders a computer using the seller’s interactive
telephone system.
 A business buys office supplies on-line or through an electronic auction.
 A retailer orders merchandise using an EDI network or a supplier’s extranet.
 A manufacturing plant orders electronic components from another plant within the
company using the company’s intranet.
 An individual withdraws funds from an automatic teller machine (ATM).
E-commerce is used everywhere in everyday life. It ranges from credit/debit card
authorization, travel reservation over a phone/network, wire fund transfers across the
globe, Point of Sale (POS) transactions in retailing, electronic banking, electronic
insurance, fund raising, political Campaigning, online education and training, on-line
auction, on-line lottery and so on.
Power of On-line Databases.
On-line databases are a blessing for the international marketer. Through them you can
quickly analyze markets, compile lists of potential foreign contacts and evaluate these contacts all
within a few hours from the comfort of your PC.
The variety of information kept by these databases is vast, ranging from financial and credit
information to lists of buyers, sellers and manufacturers. Other databases keep data on import
export trade flows and other trade data. Others archive industry news clippings from around the
world.
Optimizing and Managing Email.
Email is fast, cheap and direct. It can be a powerful communication and marketing tool if
used wisely. Email is quickly becoming the most common communication tool for businesses.
On-line Press Releases.
 Writing and sending press releases is yet another part of promotion that has been positively
affected by the Internet. As you know, sending and having a press release accepted for publication
can have very positive and effective results on sales.
Web Site Promotion Strategies.
Having a Web site is not enough. You have to make sure that people end up coming to
your Web site # that is the whole point of it!
Types of E- Business
1. Business to Business (B2B) - it uses internet, extranet or private network to conduct
business with other business.
2. Business to consumer (B2C) - in which business sells products or provides services to
end- user consumer.
3. Consumer to Business (C2B) - in which individuals offer products and services to
companies and the companies pay them.
4. Consumer to consumer (C2C) - in which a consumer directly sells goods or services to
other consumers
Benefits of E-Business
 Improved accuracy, quality and time required for updating and delivering information on
products and/or services.
 Access for customers to catalogues and prices - 24 hours x 7 days.
 Improved ease, speed and immediacy of customer ordering.
 Enhanced market, industry or competitor intelligence acquired through information gathering
and research activities.
 New distribution channels via the electronic delivery of some products and services, for example,
product design collaboration, publications, software, translation services, banking, etc.
 Expansion of customer base and growth in export opportunities.
 Reduces routine administrative tasks (invoices and order records) freeing staff to focus on more
strategic activities.

Advantages of e-business
 increase productivity, lower costs and move more quickly.
 faster decision-making
 record financial transactions
 connecting with customers with personalized messaging
 worldwide presence

Impact of E- Business
 Direct sales to customer
  Anytime access from anywhere
 Lower stock outs
 Automated and convenient process

E-Business vs. International Business

- Compared with traditional business, online business is just a selling mode, which
cannot change traditional international business completely or ruin or replace
traditional international business. Compared with international business, online
business cannot separate from logistic services as all the products must be delivered to
the customers. Sometimes, the delivery cost and product cost total is still lower than
those products sold at real stores.
- For online business, brand, fame, reputation and credit are all very important for the
seller to lure more customers to visit the shopping website.
- The logistics of e-business typically have lesser constraints than international business.
Ebusinesses are not limited to venue; they can be located anywhere and still serve the
same customer.
- E-businesses significantly emphasize technology and hire more people from the web
design and development fields. In some cases, every employee may be required to have
a technical background or receive in-house training for basic web development. On the
other hand, international businesses 68 are more diverse in hiring for nontechnical
positions, such as sales representatives and display managers.
- The major financial difference between e-business and international business is cost.
E-businesses usually have lesser start-up and operational costs — buying an online
domain is much cheaper than renting land and building facilities and buying equipment.
- E-business management is typically flatter than international management. A flat
company happens when there are few levels in between top management and the entry-
level employee. In most e-businesses, low level management, such as store managers
and division managers, is unnecessary. Instead, e-businesses expand horizontally by
hiring external consultants and contract web development positions. These entities
specialize in a business service, such as e-commerce setup and online marketing. They
may work for the company but are not necessarily included in or affected by
management decisions.

E-BUSINESS VIS-À-VIS INTERNATIONAL BUSINESS

Business Organizations
- Reduce cost of doing business. Buyers and sellers meet online. Transactions are done
through internet. No need for transportation costs. Helped the organizations to do
business with lower cost and hence by increasing their profitability.
 - Increase the speed of delivery and productivity. Through courier services. o Digital
marketing. Organizations are able to showcase their new products 24/7 all over the
digital world market which brings costumer/seller relationship closer.
- It opens a new horizon for doing business with business. Helps organization in the
world to contact each other irrespective of which country they are located. This helped
to ensure quality products at much more affordable pricing due to low cost of sales
because negotiations are done online.
- Inventory management. They have the flexibility of sourcing the inventory as and when
customer places the order. As data is all electronically stored, it becomes easy for
organization to run any sort of report they need at any point of time. o The main
advantage organizations benefited from E-commerce is the way organizations managed
redefined the way they restructured their operations. The drawback of distance was
eliminated which helped organization to focus on better quality products and services,
cost effective methods of marketing finally resulting in low cost of products to
customers, improved efficiency, quick to market, lower order fulfilment time and high
level of customer service. (ECLAC. Electronic Commerce, International Trade and
Employment 2002)
MARKET
- 24/7 accessibility and paying though E-money, banks, etc. o Saves time and money. 
Higher product satisfaction.
- Connections o Organizations and its customers to have a very fast, reliable and efficient
communication channel wherein they can exchange information and transact at each
other’s will.
ECONOMY
- B2B businesses in online contributes to a majority portion of revenue from online sales
as well as it influenced and contribute a lot to global supply chain networks. Close to
21% of sales of Manufacturing firms and 14.6 % of wholesale sales in the United States
in 2013 was related to ecommerce.
- Microeconomic level analysis will show that because of the steady growth in B2B e-
commerce, the transportation cost, sourcing cost, warehousing cost and material
management cost has reduced substantially.
- The macroeconomic level impact is of growth in B2B e-commerce resulted in inflation
going down which resulted in better and increased productivity, profits and companies
becoming highly competitive.
- The impact of pricing of products in online versus brick retail is mixed. o Previous
studies found that the pricing of some of the goods sold online were higher compared
to traditional retailers and one of the main reason for the same was because of the less
number of customers who used to transact online. But recent study shows other way,
for attracting more customers and to have a high data base, online companies are
offering much lower price compared to traditional retailers which is one of the major
reason for the increase in revenue.
Exercises:
A. What are the advantages and disadvantages of e-business?
B. Which do you prefer, putting up a branch in different countries or engaging e-business
internationally? Why?
C. What would be the preparations before entering e-business?