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A firm uses several methods

to conduct international
business.

The most common methods

are given on next slidesǥ

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International Trade
It is a relatively a conservative approach that can be used by firms
to penetrate markets by exporting or to obtain supplies at a low
cost by importing. This approach entails minimal risk because the
firm does not place any of its capital at risk.

If the firm experiences a decline in its exporting or importing, it

can normally reduce or discontinue this part of its business at a low
cost.

Many large US based MNCs, including DuPont, General Electric,

IBM generate more than $4 billion in annual sales from exporting.
Nonetheless, small businesses account for more than 20% if the
value of all US exports.

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Oicensing
2 licensing obligates a firm to provide its technology like copyrights,
patents or trade names in exchange for fees or some other specified
benefits, for example AT&T and Verizon communications have
licensing agreements to build operate parts of Indiaǯs telephone
system.

2 Licensing allows firms to use their technology in foreign markets

without a major investment in foreign countries and without the
transportation cost that result exporting.

2 A major disadvantage of licensing is that it is difficult for the firms

providing the technology to ensure quality control in foreign
production process.

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ranchising
2 ranchising obligates a firm to provide a specialized sales or
service strategy, support assistance and possibly an initial
investment in the franchise in exchange for periodic fees.

2 Example: - McDonaldsǯs, Pizza Hut, Subway Sandwiches,

Blockbuster Video have franchises that are owned and managed
by local residents in many foreign countries.

2 Like licensing franchising also allows firms to penetrate foreign

markets without a major investment in foreign countries.

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cquisitions of Existing Operations
2 irms frequently acquire other firms in foreign countries as a
means of penetrating foreign markets. It allows firms to have full
control over their foreign businesses and to quickly obtain a large
portion of foreign market share.
2 An acquisition of an existing corporation is subject to the risk of
large losses, due to large investment requirement. In addition if
the foreign operation perform poorly, it may be difficult to sell the
operations at a reasonable price.
2 On other side some firms engage in partial international
acquisitions in order to obtain a stage in foreign operations.
2 This requires a smaller investment than full international
acquisitions and therefore exposes the firm to less risk. On the
other hand, the firm will not have complete control over foreign
operations that are only partially acquired.

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Œoint ventures
2 A joint venture is a venture that is jointly owned and operated by
two more firms. Many firmsǯ penetrate foreign markets by engaging
in a joint venture with firms that reside in those markets.

2 Most joint ventures allow two firms to apply their respective

comparative advantages in a given project.

2 Mostly in automobiles sector there are numerous example of joint

venture, due to that each manufacture can offer its technological
advantages. General motorsǯ has ongoing joint ventures with
automobile manufacturers in several different countries.

ÿ
Establishing New oreign Subsidiaries
2 irms can also penetrate foreign markets by establishing new
operation in foreign countries to produce and sell their products.
Like a foreign acquisition this methods requires a large
investment.
2 Establishing new subsidiaries may be preferred to foreign
acquisitions because the operation can be tailored exactly to the
firmǯs needs.
2 In additions, a smaller investment may be requir3ed that would
be needed to purchase existing operations. However the firm will
not reap any rewards from the investment until the subsidiary is
built and a customer base established.


 Summary
2 The methods of increasing international business extend from the
relatively simple approach of international trade to the more
complex approach of acquiring foreign firms or establishing new
subsidiaries.
2 Any methods of increasing international business that requires a
direct investment in foreign operations normally is referred as DI
(foreign Direct Investment).
2 International trade and licensing usually are not considered to be as
DI in foreign operations. ranchising and joint ventures tend to
require some investment in foreign operations, but to a limited
degree.
2 oreign acquisition and the establishment of new foreign
subsidiaries require substantial investment in foreign operations
and represent the largest portion of DI.
2 Many MNCs use a combination of methods to increase international
business. Motorola and IBM for example, have substantial foreign
direct investment but also derive some of their foreign revenue from
various licensing agreements, which require less DI to generate
revenue.

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 ase Example
2 The evolution of Nike began in 1962 when Phil Knight, a business
student at Stanfordǯs business school, wrote a paper on US firm
could use Japanese technology to break the German dominance of
the athletic shoe industry in the Unites states.
2 After graduation, Knight visited the Unitsuka Tiger Shoe Company
in Japan. He made a licensing agreement with that company to
produce a shoe that he sold in the US under the name of Blue
Ribbon Sports (BRS).
2 In 1972, Knight exported his shoes to Canada. In 1974, he expended
his operations into Australia. In 1977 the firm licensed factories in
Taiwan and Korea to produce athletic shoes and then sold the shoes
in Asian Countries.
2 In 1978 BRS became Nike Inc, and began to export shoes to Europe
and South America.
2 As a result of its exporting and its DI, Nike international sales
reached $1 billion by 1992 and were more than $7 billion by 2007.

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Balance of Payments

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2 The balance of payments is a summary of transactions between
domestic and foreign resident for a specified country over a
specified period of time.
2 It represents an accounting of a countryǯs international transactions
for a period, usually quarter or a year. It accounts for transactions by
business, individuals and the government.

2 A balance of payments statement can be broken down into various

components. Those that receive the most attention are current
account and the capital account.
2 The current account represents a summary of the flow of funds
between one specified country and all other countries due to
purchase of goods or services or the provisions of income on
financial assets.
2 The capital account represents a summary of the flow of funds
resulting from the sale of assets between one specified country and
all other countries over a specified period of time.

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2 Thus it compares the new foreign investments made by a
country with the foreign investments within a country over a
particular time period.

2 Transaction that reflects inflows of funds generate positive

numbers (Credits) for the countryǯs balance,
While transaction that reflect outflows of funds generate
negative numbers (Debits) for the countryǯs balance.

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 urrent ccount

The main component of the current account are: -

1. Merchandise (Goods) and Services

2. actor Income

3. Transfers

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The key components are : -

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