INTERNATIONAL ENTRY MODES AND BARRIERS

International Business

International business may be defined simply as business

transactions that take place across national borders. This broad
definition includes the very small firm that exports (or imports) a
small quantity to only one country, as well as the very large
global firm with integrated operations and strategic alliances
around the world.

• International business is a term used to collectively describe

all commercial transactions (private and governmental,
sales, investments, logistics, and transportation) that take
place between two or more nations.
• Usually, private companies undertake such transactions for
profit; governments undertake them for profit and for
political reasons.
• It refers to all those business activities which involves cross
border transactions of goods, services, resources between
two or more nations.
• Transaction of economic resources include capital, skills,
people etc. for international production of physical goods
and services such as finance, banking, insurance,
construction etc.

Multinational Companies

A multinational enterprise (MNE) is a company that has a

worldwide approach to markets and production or one with
operations in more than a country. An MNE is often called
multinational corporation (MNC) or transnational company (TNC).

Well known MNCs include fast food companies such as

McDonald's and Yum Brands, vehicle manufacturers such as
General Motors, Ford Motor Company and Toyota, consumer
electronics companies like Samsung, LG and Sony, and energy
companies such as ExxonMobil, Shell and BP. Most of the largest
corporations operate in multiple national markets.
 International business grew over the last half of the
twentieth century partly because of liberalization of both trade
and investment, and partly because doing business
internationally had become easier.

In terms of liberalization, the General Agreement on Tariffs and

Trade (GATT) negotiation rounds resulted in trade liberalization,
and this was continued with the formation of the World Trade
Organization (WTO) in 1995. At the same time, worldwide capital
movements were liberalized by most governments, particularly
with the advent of electronic funds transfers.

In terms of ease of doing business internationally, two major

forces are important:

1. technological developments which make global

communication and transportation relatively quick and
convenient; and
2. the disappearance of a substantial part of the communist
world, opening many of the world's economies to private
business.

Entry into International Business

There are some basic decisions that the firm must take before
foreign expansion like:
-which markets to enter
-when to enter those markets

These factors have been explained below:

Which foreign markets?

1. The choice based on nation’s long run profit
potential:
 Before investing in another country, it is to be considered
what returns it is likely to give. Long-run benefits of doing
business in a country depends on following factors-
• Size of market (in terms of demographics): means the
volume of the population of the target country that may be
interested in buying the product/service. This study of the
population is based on factors such as age, race, sex,
economic status, level of education, income level and
employment.
• The present wealth of consumer markets (purchasing
power): means the ability of the interested customer to buy
the product/service, in terms of money.
• Nature of competition: means the number of similar
companies present in the target country.

By considering such factors firm can rank countries in terms of

their attractiveness and long-run profit.

Example- selling Honda home robots eg. Nuvo and baby robots in
the country like India, where there is no such population that
intend to buy those robots and not such money to afford them,
will be a complete failure.

2. Look in detail political factors which influence foreign

markets:

Political factors refers to political decisions, conditions,

events, or activities in a country that affect the business
climate. These risks could cause investors to earn less
money than anticipated.
It is to be analysed what the target country’s government
thinks about the invasion of foreign countries entering in
their country’s market. Some of the governments are liberal
while others are not.
Some factors are:
• Rues and regulations of the target country: what are the
procedures of doing business in the target country

• Charges to be paid: the amount that is to be paid as fees of

entering in the target country is also be considered.

• Type of political system: democratic, totalitarian or mixed

economy.
a. Democratic System (Market economy)

 The general population has the right to vote and decide

on the rules that govern them.
 People can own property and run businesses. They are
encouraged to be entrepreneurs.
 Market-oriented or capitalist economy that usually
promotes free trade.

b. Totalitarian Systems (Command economy/Centrally

planned economy)

 People have no democratic rights.

 Examples include North Korea and Cuba.
 Power is centralized and the military is used to enforce
rules.
 Usually a single party rule or dictatorship.
 Most of these nations have a command economy which
means the government allocates resources.
 People cannot control their own business and are told
what kind of work they will do. Entrepreneurship is
discouraged.

c. Mixed System (Mixed economy)

  In practice, most countries have a mixed economy
which has characteristics of both the market and command
economies.
Doing business with command economies or countries in
transition between political systems can be risky.

• Political independence: when a country makes decisions

without considering how those decisions might impact other
countries.

• Political interdependence: when a country makes political

decisions based on how it impacts them as well as other
countries. Political influence from other countries shapes your
own country’s political decisions.

• Economic Imperialism: the exploitation of developing countries by

more developed countries.

Example: India is much imperialized by USA in several of its

decisions such as Indo-Nuclear Deal.

3. Consideration of economic factors the affect the

international business:

It is to be taken into mind that under what conditions the

target country’s economy is working, whether it is recession
or boom period. Starting a trade with the country who is
already facing the recession period due to less demand,
would not be a good decision.

Example: at time of recession period in India none of the

foreign markets wanted to invest in India due to lesser
demand and ultimately less profits or may be losses.
When to enter the foreign markets?
It is important to consider the timing of entry.
• Entry is early when an international business enters a
foreign market before other foreign firms. Example:
Launched in 1992, Uncle Chipps was a pioneer in branded
potato chips in India. The extremely popular brand has
grown from strength to strength post acquisition with
consumers feeling a very strong connection with it.

• And late, when it enters after other international businesses.

The advantage is when firms enter early in the foreign
market commonly known as first-mover advantages.
Example:

First mover advantages-

 It’s the ability to prevent rivals and capture demand by
establishing a strong brand name.
 Ability to build sales volume in that country so that they
can drive them out of market.
 Ability to create customer relationship.

Disadvantages-

 Firm has to devote effort, time and expense to learning

the rules of the country.
 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)

Modes of Entry in International Business

Entry modes

Exporting Licensing Franchisin Trunkey

g project
 Mergers Joint Acquisitio Wholly
Venture ns owned
Subsidiary
1. Exporting

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".

The definition of "export" is when you trade something out of

the country. In economics, an export is any good or
commodity, transported from one country to another country in
a legitimate fashion, typically for use in trade.

In national accounts "exports" consist of transactions in goods

and services (sales, barter, gifts or grants) from residents to
non-residents. A general delimitation of exports in national
accounts is given below:

• An export of a good occurs when there is a change of

ownership from a resident to a non-resident; this does not
necessarily imply that the good in question physically crosses
the frontier. However, in specific cases national accounts
impute changes of ownership even though in legal terms no
change of ownership takes place (e.g. cross border financial
leasing, cross border deliveries between affiliates of the same
enterprise, goods crossing the border for significant processing
to order or repair). Also smuggled goods must be included in
the export measurement.
• Export of services consists of all services rendered by
residents to non-residents. In national accounts any direct
purchases by non-residents in the economic territory of a
country are recorded as exports of services; therefore all
expenditure by foreign tourists in the economic territory of a
 country is considered as part of the exports of services of that
country. Also international flows of illegal services must be
included.

National accountants often need to make adjustments to the

basic trade data in order to comply with national accounts
concepts; the concepts for basic trade statistics often differ in
terms of definition and coverage from the requirements in the
national accounts:

• Data on international trade in goods are mostly obtained

through declarations to custom services. If a country applies
the general trade system, all goods entering or leaving the
country are recorded. If the special trade system (e.g. extra-EU
trade statistics) is applied goods which are received into
customs warehouses are not recorded in external trade
statistics unless they subsequently go into free circulation in
the country of receipt.
• A special case is the intra-EU trade statistics. Since goods
move freely between the member states of the EU without
customs controls, statistics on trade in goods between the
member states must be obtained through surveys. To reduce
the statistical burden on the respondents small scale traders
are excluded from the reporting obligation.
• Statistical recording of trade in services is based on
declarations by banks to their central banks or by surveys of
the main operators. In a globalized economy where services
can be rendered via electronic means (e.g. internet) the related
international flows of services are difficult to identify.
• Basic statistics on international trade normally do not record
smuggled goods or international flows of illegal services. A
small fraction of the smuggled goods and illegal services may
nevertheless be included in official trade statistics through
dummy shipments or dummy declarations that serve to
conceal the illegal nature of the activities.

Process
Methods of export include a product or good or information being
mailed, hand-delivered, shipped by air, shipped by boat, uploaded
to an internet site, or downloaded from an internet site. Exports
also include the distribution of information that can be sent in the
form of an email, an email attachment, a fax or can be shared
during a telephone conversation.

In India, all exports and imports are governed by the EXIM policy.

India Exim Policy - Foreign Trade Policy.

Exim Policy or Foreign Trade Policy is a set of guidelines

and instructions established by the DGFT in matters
related to the import and export of goods in India.

The Foreign Trade Policy of India is guided by the Export

Import in known as in short EXIM Policy of the Indian
Government and is regulated by the Foreign Trade
Development and Regulation Act, 1992.

DGFT (Directorate General of Foreign Trade) is the main

governing body in matters related to Exim Policy. The main
objective of the Foreign Trade (Development and Regulation) Act
is to provide the development and regulation of foreign trade
by facilitating imports into, and augmenting exports from India.
Foreign Trade Act has replaced the earlier law known as the
imports and Exports (Control) Act 1947.

• INDIRECT EXPORTING: exporting to destination through an

intermediary. Eg. India expots sugar to Pakistan through
Singapore and Dubai
• DIRECT EXPORTING: is selling the products in a foreign
country directly through its distribution arrangement or
through a host country’s company.
 • INTRACORPORATE TRANSFER: are selling of products by a
company to its affiliation company in host country (or
another country). Eg. HLL in India to UNILEVER in USA

How to start export business

1. Identifying Products For Export

2. Market Selection
3. SWOT Analysis
4. Registration of Exporters with RBI, DGFT, Export
Promotion Council, Income Tax Authorities and
commodity boards
5. Export License
6. Export Pricing And Costing
7. Understanding Foreign Exchange Rates
8. Export Risks Management
9. Packaging And Labeling Of Goods
10. Inspection Certificates And Quality Control
11. Custom Procedure For Export

Advantages Of Exporting:
• Need for limited finance;
If 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.

• Less Risks;
Exporting 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.
• Motivation for exporting:
Motivation 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.

Disadvantages

• Difficulty in identifying customer needs

• Potential problems with local distributors

• Logistical considerations(costs of warehousing, transport,
distribution, longer supply lines, difficulties in
communication)

2. Mergers and Acquisitions

A general term used to refer to the consolidation of

companies. A merger is a combination of two companies to
form a new company, while an acquisition is the purchase of
one company by another in which no new company is
formed.

Distinction between Mergers and Acquisitions

Although they are often uttered in the same breath and used
as though they were synonymous, the terms merger and
acquisition mean slightly different things.

• When one company takes over another and clearly

established itself as the new owner, the purchase is
 called an acquisition. From a legal point of view, the
target company ceases to exist, the buyer "swallows"
the business and the buyer's stock continues to be
traded. Example: Dabur India announced its first
overseas acquisition on 27th July, 2010, buying Hobi
Kozmetik Group, a leading personal care products
company in Turkey, with a view to consolidate their
presence in the Middle East and North Africa region.
• In the pure sense of the term, a merger happens when
two firms, often of about the same size, agree to go
forward as a single new company rather than remain
separately owned and operated. This kind of action is
more precisely referred to as a "merger of equals." Both
companies' stocks are surrendered and new company
stock is issued in its place. Example: Automobile
company Mahindra & Mahindra bought Kinetic Co. in
2009.

Varieties of Mergers

From the perspective of business structures, there is a whole host

of different mergers. Here are a few types, distinguished by the
relationship between the two companies that are merging:

• Horizontal merger - Two companies that are in direct

competition and share the same product lines and markets.
Example: The formation of Brook Bond Lipton India Ltd.
through the merger of Lipton India and Brook Bond.
• Vertical merger - A customer and company or a supplier and
company. Think of a cone supplier merging with an ice
cream maker.
• Market-extension merger - Two companies that sell the
same products in different markets.
• Product-extension merger - Two companies selling different
but related products in the same market.
• Conglomeration - Two companies that have no common
business areas.

There are two types of mergers that are distinguished by

how the merger is financed. Each has certain implications for
the companies involved and for investors:
o Purchase Mergers - As the name suggests, this kind of
merger occurs when one company purchases another.
The purchase is made with cash or through the issue of
some kind of debt instrument; the sale is taxable.

Acquiring companies often prefer this type of merger

because it can provide them with a tax benefit.
Acquired assets can be written-up to the actual
purchase price, and the difference between the book
value and the purchase price of the assets
can depreciate annually, reducing taxes payable by the
acquiring company. We will discuss this further in part
four of this tutorial.
o Consolidation Mergers - With this merger, a brand new
company is formed and both companies are bought and
combined under the new entity. The tax terms are the
same as those of a purchase merger.

Acquisitions
Like mergers, acquisitions are actions through which
companies seek economies of scale, efficiencies and
enhanced market visibility.

Unlike all mergers, all acquisitions involve one firm

purchasing another - there is no exchange of stock
or consolidation as a new company.

Acquisitions are often congenial, and all parties feel

satisfied with the deal. Other times, acquisitions are more
hostile.

In an acquisition, as in some of the merger deals we

discuss above, a company can buy another company with
cash, stock or a combination of the two. Another
possibility, which is common in smaller deals, is for one
company to acquire all the assets of another company.
 Example: Company X buys all of Company Y's assets for
cash, which means that Company Y will have only cash
(and debt, if they had debt before). Of course, Company Y
becomes merely a shell and will eventually liquidate or
enter another area of business.
• Another type of acquisition is a reverse merger, a deal that
enables a private company to get publicly-listed in a
relatively short time period. A reverse merger occurs when a
private company that has strong prospects and is eager to
raise financing buys a publicly-listed shell company, usually
one with no business and limited assets. The private
company reverse merges into the public company, and
together they become an entirely new public corporation
with tradable shares.

Regardless of their category or structure, all mergers and

acquisitions have one common goal: they are all meant to create
synergy that makes the value of the combined companies greater
than the sum of the two parts. The success of a merger or
acquisition depends on whether this synergy is achieved.

Advantages:
• The company immediately gets the ownership and control
over the
acquired firm’s factories, employee, technology, brand name
and
distribution networks.
• The company can formulate international strategy and
generate more
revenues.
• If the industry already reached the stage of optimum
capacity level or
overcapacity level in the host country. This strategy helps
the host
country.

Disadvantages:
• Acquiring a firm in a foreign country is a complex task
involving
 bankers, lawyer’s regulation, mergers and acquisition
specialists from
the two countries.
• This strategy adds no capacity to the industry.
• Sometimes host countries imposed restrictions on
acquisition of local
companies by the foreign companies.
• Labor problem of the host country’s companies are also
transferred to
the acquired company.

3. Licensing
In 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.

Because little investment on the part of the licensor is

required, licensing has the potential to provide a very large
ROI. However, because the licensee produces and markets
the product, potential returns from manufacturing and
marketing activities may be lost.
Cross-licensing Agreement

A firm might license some valuable intangible property to a

foreign partner, but in addition to a royalty payment, the firm
might also request that the foreign partner license some of its
valuable know-how to the firm.

Eg. NSE has enabled Indian investors to access US

Capital market and vice-versa through a cross-licensing
agreement, on 10 March, 2010

Advantages;:-
• Low investment on the part of licensor.
• Low financial risk to the licensor
• Licensor can investigate the foreign market without much
efforts on
his part.
• Licensee gets the benefits with less investment on research
and
development
• Licensee escapes himself from the risk of product failure.

Disadvantages:
• It reduces market opportunities for both the parties have to
maintain the product quality and promote the product.
Therefore one party can affect the other through their
improper acts.
• Chance for misunderstanding between the parties.
• Chance for leakages of the trade secrets of the licensor.

• Licensee may develop his reputation

• Licensee may sell the product outside the agreed territory

and after the
expiry of the contract.
Example: Eg. Philips has entered into a brand licensing
agreement with Videocon under which it will assume the
responsibility of selling and after sale services of Philips
consumer television set in India, for 5 yrs.

4. Franchising
Under 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:
1. Trade marks
2. Operating System
3. Product reputation
4. Continuous support system like advertising , employee
training ,
reservation services quality assurances program etc.

Advantages:
• Low investment and low risk.

• Franchisor can get the information regarding the market

culture, customs and environment of the host country.

• Franchisor learns more from the experience of the

franchisees.

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

• Franchisee escapes from the risk of product failure.

Disadvantages:
 • It may be more complicating than domestic franchising.
•
It is difficult to control the international franchisee.
•
It reduce the market opportunities for both

• Both the parties have the responsibilities to maintain

product quality and product promotion.

• There is a problem of leakage of trade secrets.

Eg. Italian designer goods maker Gucci entered the Indian

retail market through its Indian franchisee Luxury Goods Retail.

5. Joint Venture
Two or more firm join together to create a new business
entity that is
legally separate and distinct from its parents. It involves
shared ownership. Various environmental factors like social,
technological economic and political encourage the
formation of joint ventures. It 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.

Advantages:
• Joint venture provides large capital funds suitable for major
projects.
• It spread the risk between or among partners.
• It provides skills like technical skills, technology, human
skills, expertise, and marketing skills.

• It makes large projects and turn key projects feasible and

possible.
 • Its synergy due to combined efforts of varied parties.

Disadvantages:
• Conflict may arise.
• Partner delay the decision making once the dispute arises.
Then the
operations become unresponsive and inefficient.
• Life cycle of a joint venture is hindered by many causes of
collapse.
• Scope for collapse of a joint venture is more due to entry of
competitors.
• The decision making is slowed down in joint ventures due to
the
involvement of a number of parties.

Eg. Bharti Airtel-Singapore Telecom

6. Trunkey Projects
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 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.

Example: nuclear power plants, airports, oil refinery, national

highways, railway line etc. Hence they are multiyear project.

7. Wholly Owned Subsidiary

Subsidiary means individual body under parent body. This
Subsidiary or
individual body as per its 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 reason for this distinction is that alone company cannot be

a subsidiary of any organization; only an entity representing a
legal fiction as a separate entity can be a subsidiary.

While individuals have the capacity to act on their own

initiative, a business entity can only act through its directors,
officers and employees.

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 50% 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.
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.

Examples: holding companies such as Berkshire Hathaway,

Time Warner, or Citigroup as well as more focused companies
such also BM, or Xerox Corporation. These, and others,
organize their businesses into national or functional
subsidiaries, sometimes with multiple levels of subsidiaries.

8. Foreign Direct Investment

Foreign direct investment (FDI) is the direct ownership of
facilities in the target country. It involves the transfer of
resources including capital, technology, and personnel.
Direct foreign investment may be made through the
acquisition of an existing entity or the establishment of a
new enterprise.

Direct ownership provides a high degree of control in the

operations and the ability to better know the consumers and
 competitive environment. However, it requires a high level of
resources and a high degree of commitment.

International Business Barriers

Three Barriers To International Trade

When we talk about international trade we mean the exchange

of goods and/or services. This exchange usually takes place
between two parties from different countries or between two
countries located anywhere on the globe.

If the international trade takes place between two parties, it is

known as bilateral trade and if the trade takes place between
more than two parties, it is known as multi-lateral trade.

There are basically three barriers to international trade that

are used by countries, and they are as follows:

1. Non-tariff Barrier

Usually this type of barrier is imposed by a country on

imports so that the quantity of imported items is restricted. Due
to this, the availability of the imported item or items is restricted
in the domestic market and the price too is very high.

Example: Quota System, Domestic Content Requirements,

Import Licenses

2. Tariff Barrier

This is barrier is in the form of duties, taxes, quotas etc.

Because of this barrier, imports decrease and price of imported
products increase which results in the fall in the demand giving
boost to domestic products.

Classification Of Tariff Barriers

 1. On Basis of origin & destination of goods

 Export Duty: Tax that is paid on goods leaving a country

 Import Duty: Tax that is paid on goods coming in a country
 Transit Duty: Tax that is paid on goods crossing the national
borders of a country

2. Basis of quantification of tariff

 Specific Duty: tariff of a specific amount of money that

does not vary with the price of the good. These tariffs are
vulnerable to changes in the market or inflation unless
updated periodically.

 Ad-Valorem: a set percentage of the value of the good

that is being imported. Sometimes these are problematic,
as when the international price of a good falls, so does the
tariff, and domestic industries become more vulnerable to
competition. Conversely, when the price of a good rises on
the international market so does the tariff, but a country is
often less interested in protection when the price is high.

 Compound duty: combination of specific duty and ad-

valorem.

3. Basis of the purpose they serve

 Revenue tariff: a set of rates designed primarily to raise

money for the government. A tariff on coffee imports
imposed by countries where coffee cannot be grown, for
example raises a steady flow of revenue.
 Protective tariff: intended to artificially inflate prices of
imports and protect domestic industries from foreign
competition especially from competitors whose host nations
 allow them to operate under conditions that are illegal in
the protected nation, or who subsidize their exports.
 Anti-dumping duty: tariff to increase the price of the imports
to their original price so as to avoid dumping.
 Countervailing duty: additional duty imposed to offset the
effect of concessions and subsidies given to the exporting
country from its government.

4. Voluntary Constraint

This is a type of international trade barrier wherein a country

voluntarily restricts or stops imports from coming in. This is
usually used to limit the competition that domestic industries will
face with the coming in of imported goods.

Whenever a country starts international trade with another

country, these three barriers to international trade are always
taken into account. It has been seen that lower developed
countries and developing countries tend to favor these three
barriers to international trade as the countries can earn foreign
exchange by introducing tariff and non-tariff barrier, the local
industries are protected from competition by foreign companies
and industries and as less imported goods are available in the
country, consumers tend to buy local products giving the local
industries a boost.

Bibliography:

www.wikipedia.com

www.quickmba.com

www.investopedia.com
www.infodrive.com

ISHMEET KAUR

MBA-3rd Sem

BPIBS

01611403909