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 potential:
events. sex. Nature of competition: means the number of similar companies present in the target country. will be a complete failure. The present wealth of consumer markets (purchasing power): means the ability of the interested customer to buy the product/service. or activities in a country that affect the business climate. income level and employment. in terms of money. Some of the governments are liberal while others are not. race. Long-run benefits of doing business in a country depends on following factorsSize 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. Example. conditions.selling Honda home robots eg. Nuvo and baby robots in the country like India. It is to be analysed what the target country’s government thinks about the invasion of foreign countries entering in their country’s market.
2. where there is no such population that intend to buy those robots and not such money to afford them. it is to be considered what returns it is likely to give. economic status.
By considering such factors firm can rank countries in terms of their attractiveness and long-run profit.•
Before investing in another country. Some factors are:
. These risks could cause investors to earn less money than anticipated. This study of the population is based on factors such as age.
Look in detail political factors which influence foreign markets: Political factors refers to political decisions. level of education.
Examples include North Korea and Cuba. People can own property and run businesses.
c. Market-oriented or capitalist economy that usually promotes free trade. a. totalitarian or mixed economy. People cannot control their own business and are told what kind of work they will do.
b. Totalitarian Systems (Command economy/Centrally planned economy) People have no democratic rights. Type of political system: democratic. Most of these nations have a command economy which means the government allocates resources. They are encouraged to be entrepreneurs. Mixed System (Mixed economy)
. Democratic System (Market economy) The general population has the right to vote and decide on the rules that govern them. Entrepreneurship is discouraged. Usually a single party rule or dictatorship.•
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. Power is centralized and the military is used to enforce rules.
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. Political influence from other countries shapes your own country’s political decisions.In practice. Starting a trade with the country who is already facing the recession period due to less demand.
Political interdependence: when a country makes political decisions based on how it impacts them as well as other countries.
Economic Imperialism: the exploitation of developing countries by more developed countries.
Political independence: when a country makes decisions without considering how those decisions might impact other countries. most countries have a mixed economy which has characteristics of both the market and command economies. would not be a good decision. Doing business with command economies or countries in transition between political systems can be risky.
Example: India is much imperialized by USA in several of its decisions such as Indo-Nuclear Deal.
3. 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.
And late. Example: Launched in 1992. Ability to create customer relationship. Example:
First mover advantages It’s the ability to prevent rivals and capture demand by establishing a strong brand name. Disadvantages Firm has to devote effort. Uncle Chipps was a pioneer in branded potato chips in India.When to enter the foreign markets? It is important to consider the timing of entry. time and expense to learning the rules of the country. when it enters after other international businesses. Ability to build sales volume in that country so that they can drive them out of market. 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 is early when an international business enters a foreign market before other foreign firms. The advantage is when firms enter early in the foreign market commonly known as first-mover advantages. The extremely popular brand has grown from strength to strength post acquisition with consumers feeling a very strong connection with it.
in specific cases national accounts impute changes of ownership even though in legal terms no change of ownership takes place (e. However. 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". typically for use in trade. The definition of "export" is when you trade something out of the country. barter. an export is any good or commodity. cross border financial leasing. In economics. gifts or grants) from residents to non-residents.g. cross border deliveries between affiliates of the same enterprise. In national accounts "exports" consist of transactions in goods and services (sales. this does not necessarily imply that the good in question physically crosses the frontier. 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. therefore all expenditure by foreign tourists in the economic territory of a
. • 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. transported from one country to another country in a legitimate fashion. Exporting The term "export" is derived from the conceptual meaning as to ship the goods and services out of the port of a country. Also smuggled goods must be included in the export measurement. goods crossing the border for significant processing to order or repair).Mergers
Wholly owned Subsidiary
.g. In a globalized economy where services can be rendered via electronic means (e. If the special trade system (e.g. If a country applies the general trade system. Also international flows of illegal services must be included. all goods entering or leaving the country are recorded. To reduce the statistical burden on the respondents small scale traders are excluded from the reporting obligation.country is considered as part of the exports of services of that country. Since goods move freely between the member states of the EU without customs controls. 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. • A special case is the intra-EU trade statistics. internet) the related international flows of services are difficult to identify. 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. • Basic statistics on international trade normally do not record smuggled goods or international flows of illegal services. 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. National accountants often need to make adjustments to the basic trade data in order to comply with national accounts concepts. • Statistical recording of trade in services is based on declarations by banks to their central banks or by surveys of the main operators. statistics on trade in goods between the member states must be obtained through surveys.
or downloaded from an internet site. 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. an email attachment. shipped by air. DGFT (Directorate General of Foreign Trade) is the main governing body in matters related to Exim 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. In India. Foreign Trade Act has replaced the earlier law known as the imports and Exports (Control) Act 1947. Exports also include the distribution of information that can be sent in the form of an email.Foreign Trade Policy. and augmenting exports from India. all exports and imports are governed by the EXIM policy. Eg. 1992.
. 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. hand-delivered. uploaded to an internet site. 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.
INDIRECT EXPORTING: exporting to destination through an intermediary. a fax or can be shared during a telephone conversation. India Exim Policy .Methods of export include a product or good or information being mailed. shipped by boat.
DGFT. Inspection Certificates And Quality Control 11. Eg. Understanding Foreign Exchange Rates 8. Export Risks Management 9. Export License 6. 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. HLL in India to UNILEVER in USA
How to start export business 1. Exporting involves less risk as the company understand the culture . Identifying Products For Export 2. Later after understanding the host country the company can enter on a full scale. Income Tax Authorities and commodity boards 5. Export Promotion Council. Market Selection 3.
. Registration of Exporters with RBI. Export Pricing And Costing 7. Packaging And Labeling Of Goods 10. Custom Procedure For Export Advantages Of Exporting: • Need for limited finance.•
INTRACORPORATE TRANSFER: are selling of products by a company to its affiliation company in host country (or another country). SWOT Analysis 4. customer and the market of the host country gradually.
the terms merger and acquisition mean slightly different things.
Disadvantages • Difficulty in identifying customer needs
• Potential problems with local distributors • Logistical considerations(costs of warehousing.
of to of is
Distinction between Mergers and Acquisitions Although they are often uttered in the same breath and used as though they were synonymous. distribution. Mergers and Acquisitions
A general term used to refer to the consolidation companies. the purchase is
. longer supply lines. 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. transport. difficulties in communication)
2. A merger is a combination of two companies form a new company. Proactive motivations are opportunities available in the host country.•
Motivation for exporting: Motivation for exporting are proactive and reactive. while an acquisition is the purchase one company by another in which no new company formed.
When one company takes over another and clearly established itself as the new owner.
Two companies that have no common business areas. Conglomeration . the target company ceases to exist. Here are a few types. From a legal point of view. Product-extension merger . the buyer "swallows" the business and the buyer's stock continues to be traded. with a view to consolidate their presence in the Middle East and North Africa region.Two companies that sell the same products in different markets. Example: Dabur India announced its first overseas acquisition on 27th July.•
called an acquisition. distinguished by the relationship between the two companies that are merging:
• • •
Horizontal merger . Market-extension merger . This kind of action is more precisely referred to as a "merger of equals. There are two types of mergers that are distinguished by
Varieties of Mergers From the perspective of business structures. Example: Automobile company Mahindra & Mahindra bought Kinetic Co.Two companies selling different but related products in the same market. through the merger of Lipton India and Brook Bond.A customer and company or a supplier and company." Both companies' stocks are surrendered and new company stock is issued in its place. often of about the same size. Think of a cone supplier merging with an ice cream maker. a leading personal care products company in Turkey.Two companies that are in direct competition and share the same product lines and markets. in 2009. a merger happens when two firms. there is a whole host of different mergers. In the pure sense of the term. 2010. Vertical merger . Example: The formation of Brook Bond Lipton India Ltd. agree to go forward as a single new company rather than remain separately owned and operated. buying Hobi Kozmetik Group.
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.there is no exchange of stock or consolidation as a new company.As the name suggests.
.With this merger. In an acquisition.
Acquisitions Like mergers. Consolidation Mergers .how the merger is financed. We will discuss this further in part four of this tutorial. a company can buy another company with cash. 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. Another possibility. Other times. and all parties feel satisfied with the deal. The purchase is made with cash or through the issue of some kind of debt instrument. and the difference between the book value and the purchase price of the assets can depreciate annually. all acquisitions involve one firm purchasing another . stock or a combination of the two. as in some of the merger deals we discuss above. reducing taxes payable by the acquiring company. acquisitions are more hostile. Unlike all mergers. acquisitions are actions through which companies seek economies of scale. Acquisitions are often congenial. is for one company to acquire all the assets of another company. this kind of merger occurs when one company purchases another. which is common in smaller deals. Each has certain implications for the companies involved and for investors: o Purchase Mergers . efficiencies and enhanced market visibility. the sale is taxable.
This strategy helps the host country. Company Y becomes merely a shell and will eventually liquidate or enter another area of business. and together they become an entirely new public corporation with tradable shares. Another type of acquisition is a reverse merger. • The company can formulate international strategy and generate more revenues. Advantages: • The company immediately gets the ownership and control over the acquired firm’s factories. which means that Company Y will have only cash (and debt. a deal that enables a private company to get publicly-listed in a relatively short time period. Of course. if they had debt before).•
Example: Company X buys all of Company Y's assets for cash. The success of a merger or acquisition depends on whether this synergy is achieved.
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. • If the industry already reached the stage of optimum capacity level or overcapacity level in the host country. technology. The private company reverse merges into the public company. employee. usually one with no business and limited assets. Disadvantages: • Acquiring a firm in a foreign country is a complex task involving
. brand name and distribution networks. A reverse merger occurs when a private company that has strong prospects and is eager to raise financing buys a publicly-listed shell company.
investment etc. brand name etc to a manufacturer in a foreign country for a fee. Licensing In this mode of entry. managerial. However. 3. • This strategy adds no capacity to the industry. technology.
. • Labor problem of the host country’s companies are also transferred to the acquired company. licensing has the potential to provide a very large ROI. The cost of entering market through this mode is less costly. Because little investment on the part of the licensor is required. mergers and acquisition specialists from the two countries. • Sometimes host countries imposed restrictions on acquisition of local companies by the foreign companies. the domestic manufacturer leases the right to use its intellectual property i.e. potential returns from manufacturing and marketing activities may be lost. The domestic company can choose any international location and enjoy the advantages without incurring any obligations and responsibilities of ownership. lawyer’s regulation. copy rights. because the licensee produces and markets the product.bankers. Here the manufacturer in the domestic country is called licensor and the manufacturer in the foreign is called licensee.
• Chance for leakages of the trade secrets of the licensor.
. • Chance for misunderstanding between the parties. • Low financial risk to the licensor • Licensor can investigate the foreign market without much efforts on his part.:• Low investment on the part of licensor.Cross-licensing Agreement A firm might license some valuable intangible property to a foreign partner. • Licensee gets the benefits with less investment on research and development • Licensee escapes himself from the risk of product failure. • Licensee may develop his reputation • Licensee may sell the product outside the agreed territory and after the expiry of the contract. Eg. the firm might also request that the foreign partner license some of its valuable know-how to the firm. NSE has enabled Indian investors to access US Capital market and vice-versa through a cross-licensing agreement. on 10 March. Therefore one party can affect the other through their improper acts. Disadvantages: • It reduces market opportunities for both the parties have to maintain the product quality and promote the product. but in addition to a royalty payment. 2010 Advantages.
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. • Franchisor can get the information regarding the market culture. Franchising Under franchising an independent organization called the franchisee operates the business under the name of another company called the franchisor. employee training . The franchisor provides the following services to the franchisee: 1. Operating System 3.Example: Eg. • Franchisee get the benefits of R& D with low cost. Continuous support system like advertising . Trade marks 2. reservation services quality assurances program etc. customs and environment of the host country. Advantages: • Low investment and low risk. Under this agreement the franchisee pays a fee to the franchisor. • Franchisor learns more from the experience of the franchisees. for 5 yrs. 4. Product reputation 4. Disadvantages:
. • Franchisee escapes from the risk of product failure.
. human skills. 5. Advantages: • Joint venture provides large capital funds suitable for major projects. • It is difficult to control the international franchisee. technological economic and political encourage the formation of joint ventures. It involves shared ownership. required human talent etc. • It provides skills like technical skills. Various environmental factors like social. • It spread the risk between or among partners. And enable the companies to share the risk in the foreign markets. Eg. and marketing skills. expertise. Joint Venture Two or more firm join together to create a new business entity that is legally separate and distinct from its parents. latest technology. This act improves the local image in the host country and also satisfies the governmental joint venture. • It makes large projects and turn key projects feasible and possible. Italian designer goods maker Gucci entered the Indian retail market through its Indian franchisee Luxury Goods Retail. • It reduce the market opportunities for both • Both the parties have the responsibilities to maintain product quality and product promotion. technology. It provides strength in terms of required capital. • There is a problem of leakage of trade secrets.• It may be more complicating than domestic franchising.
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. 7. Then the operations become unresponsive and inefficient. Hence they are multiyear project. payment on cost plus basis. airports. Eg. Trunkey Projects A turnkey project is a contract under which a firm agrees to fully design. • Scope for collapse of a joint venture is more due to entry of competitors. • Partner delay the decision making once the dispute arises. oil refinery. • Life cycle of a joint venture is hindered by many causes of collapse. This Subsidiary or individual body as per its own generates revenue. Bharti Airtel-Singapore Telecom
6. railway line etc. national highways. Wholly Owned Subsidiary Subsidiary means individual body under parent body. They give
. Disadvantages: • Conflict may arise. Example: nuclear power plants. • The decision making is slowed down in joint ventures due to the involvement of a number of parties.• Its synergy due to combined efforts of varied parties. This form of pricing allows the company to shift the risk of inflation enhanced costs to the purchaser.
The controlled entity is called a company. This gives rise to the common presumption that 50% plus one share is enough to create a subsidiary. 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.
. or limited liability company. however. salary to employees. The reason for this distinction is that alone company cannot be a subsidiary of any organization. corporation. There are no branches here. in business matters. There are. A subsidiary.their own rent. a business entity can only act through its directors. Only the certain percentage of the profit will be given to the parent body. But policies and trademark will be implemented from the Parent body. is an entity that is controlled by a bigger and more powerful entity. officers and employees. etc. These shares give the parent the necessary votes to determine the composition of the board of the subsidiary and so exercise control. and the controlling entity is called its parent (or the parent company). While individuals have the capacity to act on their own initiative. The most common way that control of a subsidiary is achieved is through the ownership of shares in the subsidiary by the parent. only an entity representing a legal fiction as a separate entity can be a subsidiary.
sometimes with multiple levels of subsidiaries. It involves the transfer of resources including capital. Subsidiaries are separate. legal entities for the purposes of taxation and regulation.A subsidiary may itself have subsidiaries. or Xerox Corporation. These. organize their businesses into national or functional subsidiaries. distinct. and not legally or otherwise distinct from it. Examples: holding companies such as Berkshire Hathaway. Direct foreign investment may be made through the acquisition of an existing entity or the establishment of a new enterprise. or Citigroup as well as more focused companies such also BM. technology. they differ from divisions. Foreign Direct Investment Foreign direct investment (FDI) is the direct ownership of facilities in the target country. and personnel. A parent and all its subsidiaries together are called a group. and others. although this term can also apply to cooperating companies and their subsidiaries with varying degrees of shared ownership. Direct ownership provides a high degree of control in the operations and the ability to better know the consumers and
. 8. may have subsidiaries of their own. which are businesses fully integrated within the main company. For this reason. Time Warner. and these. Subsidiaries are a common feature of business life and most if not all major businesses organize their operations in this way. in turn.
Example: Quota System. quotas etc. There are basically three barriers to international trade that are used by countries. it is known as multi-lateral trade. Tariff Barrier This is barrier is in the form of duties. taxes.competitive environment. Import Licenses 2. Classification Of Tariff Barriers
. However. it requires a high level of resources and a high degree of commitment. the availability of the imported item or items is restricted in the domestic market and the price too is very high. 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. imports decrease and price of imported products increase which results in the fall in the demand giving boost to domestic products. This exchange usually takes place between two parties from different countries or between two countries located anywhere on the globe. it is known as bilateral trade and if the trade takes place between more than two parties. Because of this barrier. and they are as follows: 1. If the international trade takes place between two parties. Domestic Content Requirements. International Business Barriers Three Barriers To International Trade When we talk about international trade we mean the exchange of goods and/or services.
Basis of the purpose they serve
Revenue tariff: a set of rates designed primarily to raise money for the government. Conversely. 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. but a country is often less interested in protection when the price is high.1. for example raises a steady flow of revenue.
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. and domestic industries become more vulnerable to competition. as when the international price of a good falls. Sometimes these are problematic.
Compound duty: combination of specific duty and advalorem. when the price of a good rises on the international market so does the tariff.
3. Protective tariff: intended to artificially inflate prices of imports and protect domestic industries from foreign competition especially from competitors whose host nations
. so does the tariff. A tariff on coffee imports imposed by countries where coffee cannot be grown. Basis of quantification of tariff Specific Duty: tariff of a specific amount of money that does not vary with the price of the good.
com www. or who subsidize their exports. Voluntary Constraint This is a type of international trade barrier wherein a country voluntarily restricts or stops imports from coming in. these three barriers to international trade are always taken into account.quickmba.
allow them to operate under conditions that are illegal in the protected nation.
. Countervailing duty: additional duty imposed to offset the effect of concessions and subsidies given to the exporting country from its government. the local industries are protected from competition by foreign companies and industries and as less imported goods are available in the country. 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. consumers tend to buy local products giving the local industries a boost. 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. Anti-dumping duty: tariff to increase the price of the imports to their original price so as to avoid dumping.com www.wikipedia.investopedia.
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