NATURE AND SCOPE OF ENTREPRENEURSHIP

EVOLUTION OF ENTREPRENEURSHIP

The word entrepreneurship is derived from the French word ‘‘entreprede’’ which means
‘‘to undertake’’. Entrepreneurship began as a concept to identify one who undertakes to
organise, manage and assume the risk of the business.

The risk-bearing part dates back to the eighteen century when French economist Richard
Cantillon mathched it with the term ‘entrepreneur’. Economics and entrepreneurship
remained closely tied through the years as noted economists such as Jean Baptise Say
(1803) and Joseph Schumpeter (1934) continued to write about entrepreneurship and its
impact to economic development.

The evolutionary process of entrepreneurship activities may be divided into the following
broad stages:

Hunting Stage: The primary stage of the evolution of the economic life of man was hunting
stage. Wants were limited and very few in numbers. The family members
themselves satisfied problems of food, clothing and shelter. Producers were the
consumers also. Robinson Crusoe, living in the deserted island, satisfying his own
requirements had no knowledge of business. People in some parts of Africa and
India still lead this type of life. In this stage problems of production and distribution
were not complexed since wants were simple and limited.

Pastoral Stage: With the progress of mankind gradually mental understanding developed
and people started realizing that instead of killing animals, they should breed and
rear them. Thus cattle breeding encouraged the use of milk, and they had to think
in terms of grazing areas for their cattle. The surplus milk, meat and other related
products were spared of exchange. This stage can be termed as the first stage of
economic development and the beginning of commerce.

Agricultural Stage: In search of grazing areas, they further realized that they should grow
plants as food for animals. They started testing some grain products and slowly
developed a taste in plants and the land was used for cultivation. Groups of persons
started living together on their agricultural fields, which were subsequently
converted into small villages with their farms. Free exchange of goods was started
and the activities were also divided to the extent of division of labor at the village
level to complement the needs of each other. Initially each village was self sufficient,
but later they began small trading activities on barter basis.

Handicraft Stage: In the agricultural stage, people started learning the use of cloth made of
cotton products, and they developed the segments of the workers for different
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 activities. Cottage scale setup was developed at the village level to nearby villages,
and in exchange they brought requirements either to consume themselves or for
their village friends. Since the demand for gold coins, silver coins, skin and hide etc
increased the activities of cobblers, gold smiths, and blacksmiths, laborers also
rapidly increased, and caste system was also formed on the basis of activities they
did. Everybody selected their job according to their own choice and taste.

Present Industrial Stage: The use of mechanical devices and the commonly acceptable
form of monetary system accelerated the growth of entrepreneurship activities. The
progress of science and the increase in the means of transportation and
communication enabled to travel widely and the markets were developed in the
country and abroad.

The concept of entrepreneurship has undergone many developments, nowadays

entrepreneurs are known as innovators or developers who recognise and seize
opportunities and then convert them into marketable ideas. The process continues on
where value is added to it through resources like efforts, skills, time money etc

Over years various definitions have been used to describe entrepreneurship but the
definition in twentieth century linked the term with free entreprise and capitalism. Three
specific activities have been recognised to be performed by entrepreneurs, these are:

a) Serving as an agent for change.

b) Providing creative ideas for enterprise
c) Helping the business to grow and become profitable.

Entrepreneurs are the people with the ability to see and evaluate business opportunities
to gather the necessary resources to take advantage of them and initiate appropriate action
to insure success.

Entrepreneurship is a dynamic process of creating something new with value by devoting

the necessary time and effort, assuming accompanying risks (financial, psychic and social)
and receiving the resulting rewards (monetary, personal satisfaction and independence).

He is the person who owns, organise and manage a business and in so doing assumes the
risk of either making profit or losing the investment. He is the planner with the vision and
mission who is dedicated to run his business with success.

The entrepreneur always looking for new opportunities either in the existing enterprise or
by creating new enterprise.

They produce the combination of ideas, money, skills, equipment and market that forms a
successful enterprise.

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Entrepreneurship involves the main three components.

1. Initiative taking
2. Organizing and reorganize social and economic mechanisms to turn resources and
situation into something of value (practical account)
3. Accepting of risk of failure and capital losing

CHARACTERISTICS OF ENTREPRENEUR

Calculated Risk-bearing: Entrepreneurs are the persons who take decisions under
uncertainty and thus they are willing to take risk, but they never gamble with the results.
They choose moderate risk rather than play wild gamble. They, therefore, undertake
calculated risk which is high enough to be exciting, but with a fairly reasonable chance to
win.

Internal locus of control: An individual perceives the outcome of an event as being either
within or beyond his personal control. Entrepreneurs believe in their own ability to control
the consequences of their endeavour by influencing their socio-economic environment
rather than leave everything to luck. They strongly believe that they can govern and shape
their own destiny.

An eye for opportunity (opportunity oriented, Converts a situation into opportunity.):

Many entrepreneurs start by finding a need and quickly satisfying it. They are always alert
to opportunities. They are very much quick to see and grab opportunities. They plan
intellectually and anticipate carefully how to achieve their goals in realizing an
opportunity.

Independent minded: Even though most entrepreneurs know how to work within the
framework for the sake of profits, they enjoy being their own boss. They like doing things
their own way. The characteristics of independence and the sense of determination are the
drives that make an entrepreneur start their own business. In a way, their own business
fulfils their need for independence.

An appetite for hard work: Most entrepreneurs start out working long, hard, hours with
little play. Entrepreneurs are always at work even when other people have stopped. They
are persistent and strongly believe that working hard will help them attain their goals.
They hence focus on the end result.

Self-confidence: Entrepreneurs must demonstrate extreme self-confidence in order to

cope with all the risks of operating their own business. Most successful entrepreneurs are
confident of achieving realistic and challenging goals. They get into business or industry
with a high level of self-confidence. This, couples with a sense of effectiveness ultimately
contribute to the success of the venture.
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Discipline: Successful entrepreneurs resist the temptation to do what is unimportant or
the easiest but have the ability to think through what is the most essential. Entrepreneurs
are economically efficient, do not like to waste time and they like to see work completed.
They use discipline as a guide to their destination.

Judgement: Successful entrepreneurs have the ability to think quickly and make a wise
decision. This is possible because they have a plan, they have an economic goal, they know
what they want and they know what they can do. Entrepreneurs are unaffected by personal
likes and dislikes. They stand beyond these types of prejudices as they are realistic in their
approach. At the time of their need they select experts rather than friends and relatives to
assist them. They usually avoid emotional and sensitive attitude towards their business or
problem.

Flexible and ability to accept change: Change occurs frequently when you own your own
business, the entrepreneur thrives on changes and their business grow. An entrepreneur
may need to change his/her plans in order to help the business grow. Entrepreneurs look
at many solutions to their problems. They realize that other people may know how to do
something better. Entrepreneurs can choose the best way to do something, even if it is
different from how they want to do it.

Positive response to challenges (Make stress work for them): On the roller coaster to
business success, the entrepreneur often copes by focusing on the end result and not the
process of getting there. Entrepreneurs are capable of working for long hours and solving
different complexities at the same time. As the captain of an industry or an enterprise, an
entrepreneur faces a number of problems and in right moment he takes right decisions
which may involve physical as well as mental stress.

Need to achieve: Although they keep an “eye” on profit, this is often secondary to the drive
toward personal success. Entrepreneurs have strong desire to achieve higher goals. Their
inner self motivates their behaviour towards high achievement. To an entrepreneur,
winning is achievement.

Focus on profits: Successful entrepreneurs always have the profit margin in sight and
know that their business success is measured by profits.

Creative and Innovators: Successful entrepreneurs are innovators. They constantly put
their efforts in introducing new products, new method of production, opening new markets
and reorganizing the enterprise. They always try not to be satisfied with conventional and
routine way of doing things, but always think of how they can do them in a better way.

Leadership: Entrepreneurs should possess the quality of leadership. Leadership is the

ability to exert interpersonal influence by means of communication towards the
achievement of goals. Entrepreneurs as leaders should provide the necessary spark of
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motivation by guiding, inspiring, assisting and directing the members of the group for
achievement of unity of action, efforts and purpose.

Ability to mobilize resources: Entrepreneurs must have the ability to marshal all the
inputs to obtain the end product. They have to mobilize 6Ms, i.e. Man, Money, Material,
Machinery, Market and Method effectively to realize the final product as entrepreneurship
is a function of gap filling and input completing.

Persistent problem solving: Entrepreneurs are problem solvers, although they are
persistent but are realistic in recognizing what they can and cannot do and where they can
get help in solving difficult but unavoidable tasks.

Initiative and responsibility: Entrepreneurs always seek and take initiatives, they
willingly put themselves in situations there they are personally responsible for the success
or failure of the operation.

Team building: the successful entrepreneurs have highly qualified well motivated teams
to help handle the ventures growth and development.

Versatile knowledge: has sound conceptual knowledge about all the technicalities of the
business, be it technological, operational, financial or market dynamics.

REASONS TO BECOME ENTREPRENEUR

What leads a person to strike out on his own and start a business?

a. Opportunity: Some entrepreneurs decide to dedicate their resources whenever he

thinks the opportunity is viable.
b. Autonomy: Some entrepreneurs simply want to avoid the daily grind that comes
along with a career that isn't self-sustaining.
c. Freedom: Entrepreneurs always want to be able to call their own shots, be in
charge of their destiny, and have the ability to set their lives.
d. Responsibility to society: For other entrepreneurs, there are bigger societal issues
driving their work.
e. Impact: Entrepreneurs wants to know every action they take to have a direct
impact on the outcome of the business. When you're an employee...what you do has
limited impact. When you're running the company, each and every thing you do can
make or break it.
f. Family: other entrepreneur decided to take undertake this career so as to spend as
much time with their families as possible
g. Change: Some are driven in seeing changes.
h. Legacy: Forging a lasting legacy is important for many workers, leaving a personal
legacy is a huge motivator in their decision to do entrepreneurial work.
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 i. Accomplishment: That is what truly makes people happy, a sense of
accomplishment "That's why I do what I do every day, to accomplish my goals, and
that [means] building a successful company."
j. Control: Some entrepreneurs are driven by the sense of security that comes along
with being in full control of their work and control of their own destiny.
k. Perhaps a person has been laid off once or more. Sometimes a person is
frustrated with his or her current job and doesn't see any better career prospects on
the horizon.
l. Sometimes a person realizes that his or her job is in jeopardy. A firm may be
contemplating cutbacks that could end a job or limit career or salary prospects.
Perhaps a person already has been passed over for promotion.
m. Perhaps a person sees no opportunities in existing businesses for someone
with his or her interests and skills.
n. Some people are actually repulsed by the idea of working for someone else.
They object to a system where reward is often based on seniority rather than
accomplishment, or where they have to conform to a corporate culture.
o. Other people decide to become entrepreneurs because they are disillusioned
by the bureaucracy or politics involved in getting ahead in an established business
or profession.
p. Some are tired of trying to promote a product, service, or way of doing business
that is outside the mainstream operations of a large company.

No one reason is more valid than another; none guarantee success. However, a strong
desire to start a business, combined with a good idea, careful planning, and hard work, can
lead to a very engaging and profitable endeavour.

Advantages of becoming entrepreneur

a. You are the boss. It offers the prestige of being the person in charge.
b. They decide what hours to work, as well as what to pay and whether to take vacations.
c. It gives an individual the opportunity to build equity, which can be kept, sold, or passed
on to the next generation.
d. All the business profit is yours. Entrepreneurship offers a greater possibility of
achieving significant financial rewards than working for someone else.
e. There is great variety of roles and tasks. It provides the ability to be involved in the
total operation of the business, from concept to design and creation, from sales to
business operations and customer response.
f. It gives an individual the opportunity to build equity, which can be kept, sold, or passed
on to the next generation.
g. Entrepreneurship creates an opportunity for a person to make a contribution. Most
new entrepreneurs help the local economy. A few through their innovations –
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 contribute to society as a whole. One example is entrepreneur Steve Jobs, who co-
founded Apple in 1976, and ignited the subsequent revolution in desktop computers.
h. Increase self confidence
i. Work can be satisfying

Disadvantages of becoming entrepreneur

a. All things are looking at you

b. All losses are yours
c. Working without compensations (salary) for long period
d. Long hours working
e. Exiting the business will be difficult
f. Business pressure would affect your family life

Risk and Rewards of Entrepreneurship

Starting or buying a new business involves risk, and the higher the rewards the greater the
risk entrepreneurs usually face. Entrepreneurs face a number of risk that can be grouped
into four areas:

Financial risk:

In most new venture, individual resources will be lost if the venture fails. Many people are
unwilling to risk their savings, house, salary to start a new business.

Career risk:

People ask themselves whether they would get new job or go back to their old ones if their
ventures should fail. They fear to lose their jobs. This is the concern to managers who have
a source organizational job with high salary and good benefit package.

Family and social risk:

This venture uses most of entrepreneur energy and time hence foregoing other social and
family commitments.

Psychological risk:

When the entrepreneur suffers a loss of his house, he may build the other one, but when
suffered with financial catastrophes, the entrepreneurs are severely suffered
psychologically and it is hard to recover from it.

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 Economic security risk

Risk of missing advantages of salaried employment and retirement benefits

MYTHS OF ENTREPRENEURSHIP

Throughout the years many myths have risen about entrepreneurship, ten most of the
notable myths are here under explained.

a. Entrepreneurs are Doers not thinkers

Entrepreneurs are action oriented; the emphasis today on the creation of clear and
complete business plans is indication that 'thinking' entrepreneurs are as important as
doing entrepreneurship.
b. Entrepreneurs are born not made
The ideas that the entrepreneurs cannot be taught or learned, and one must be born
entrepreneur has long been prevalent. Today the recognition of entrepreneurship as
discipline is helping to dispel this myth. Like all disciplines, entrepreneurship has models,
process and case studies that allow the topic to be studied and the knowledge to be
acquired.
c. Entrepreneurs are always inventors
The idea that the entrepreneurs are inventors are the result of misunderstanding. Although
many inventors are also entrepreneurs, numerous entrepreneurs encompass all sort of
innovation activity.
d. Entrepreneurs are academic and social misfit
The belief that entrepreneurs are academically and socially ineffective is a result of some
business owners having started successful enterprise after dropping out school or quitting
a job.
Today entrepreneurs is considered a hero-socially, economically and academically. No
longer is a misfit, the entrepreneur now viewed as a professional.

e. Entrepreneurs must fit the profile

Many entrepreneurs have presented checklist of characteristics of the successful
entrepreneur. These lists were not complete and validated. Today we realize that a
standard entrepreneurial profile is hard to compile. The environment, the venture itself
and entrepreneur have interactive effects which results in many different types of profile.
f. All Entrepreneurs' need is money
It is true a venture needs capital to survive, yet having money is not the only solution to
avoid failure. Failure due to lack of proper financing often is an indicator of other problems;
managerial incompetence, lack of financial understanding, poor investment, poor planning
etc. Money is resource but not an end in itself.
g. All Entrepreneurs' need is luck

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Luck happens when preparations meet opportunity. Prepared entrepreneurs who seize the
opportunity when it arises often seems "luck". What appears to be luck really is
preparation, determination, desire, knowledge and innovativeness.
h. Ignorance is bliss for entrepreneurs
The myth that too much planning and evaluation lead to constant problems, that overall
analysis leads to paralysis, does not hold in today's competitive markets, which demand
detailed planning and preparation. Thus careful planning is not ignorance of if is the mark
of accomplished entrepreneurs.
i. Entrepreneurs seek success but experience high failure rates
It is true that many entrepreneurs suffer a number of failures before they are successful. In
fact, failure can teach to those willing to learn. The high failure rate can be misleading
several business survive.
j. Entrepreneurs are extreme risk takers (gamblers)
Entrepreneurs usually work in moderate 'calculated risk'. Looking at them as gamblers can
be misleading. Most successful entrepreneurs work hard though planning and preparation
to minimise the risk involved in order to better control the destiny of their vision.

THEORIES OF ENTREPRENEURSHIP

APPROACHES TO ENTREPRENEURSHIP

Entrepreneurship is interdisciplinary. Contains approaches that can increase one’s

understanding in the field, thus there is the need to determine the diversity of the theories
as an emergence of entrepreneurial understanding.

One way to understand these theories is through studying the schools of thoughts of
entrepreneurship by adopting an approach of dividing the entrepreneurship into specific
activities which falls within a macro or micro view.

These approaches are categorized into two parts namely:

a) School of thought approach

b) Process approach

SCHOOL OF THOUGHT APPROACH.

We examine diversity of theories through 'school of thoughts' approach that divides

entrepreneurship into specific activities. These activities may be thought a macro or micro
view.

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MACRO VIEW

This presents a broad array of factors that relate to success or failure in contemporary
entrepreneurial ventures. They include the external factors or process which sometimes
are beyond control of the entrepreneur.

There are three schools of thoughts falling under macro view, namely; Environmental
school of thought, Financial/capital school of thought and Replacement school of
thought.

The Environmental school of thought

This deals with external factors that affect the potential entrepreneur's life style. These can
either be positive or negative.

If the middle manager experiences freedom and support to develop ideas, the work
environment will serve to promote that person's desire to pursue an entrepreneurial
career. The social group also affects. The atmosphere or friends and relatives can influence
the desire to become an entrepreneur.

Financial/capital school of thought

The search for and growth capital is the entire focus of this entrepreneurial emphasis. This
school of thought views the entire entrepreneurial venture from a financial management
stand point.

The foundations of this school are based on the capital-seeking process. The search for
start-up and growth capital is the complete focus because securing venture capital is vital
to an entrepreneur’s development. In this case, the entire entrepreneurial venture is
viewed from a financial management viewpoint and decisions involving finance occur at
every major point

Decision involving finances occur at every major point in the venture process.

Venture stage Financial Decision

Consideration

Start up Seed capital Proceed or abandon

Venture capital
sources

On going Cash management and Maintain

investment financial Increase or reduce size
analysis
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 Evaluation

Declining Profit question Sell

or Corporate budget Retire
succession Succession budget Dissolve operation

Displacement school of thought

This focuses on group phenomena, it holds that the group affects or eliminates certain
factors that project an individual into an entrepreneurial venture.

This thought process concentrates on the negative side of the existence of group, where
someone can feel out of place or be displaced from the group. It argues that a group can
slow a person’s development, either bringing it to a halt or removing specific factors vital to
the individual for them to advance. As a result the frustrated individual is motivated to
succeed which can be projected into an entrepreneurial pursuit. There are three major
types of displacement that demonstrate this school of thought.

The following three types of displacements elaborate this school; Political displacement,
Cultural displacement and Economic displacement.

Political displacement

This is caused by factors ranging from an entire political regime that rejects free enterprise
to government regulations and policies that limit or restrict certain industries.

Cultural displacement

This deals with social groups precluded from professional fields. Ethnic background,
religion, race and sex are all examples of factors that figure the minority experience.
Increasingly, this experience will turn various individuals from standard business
procession towards entrepreneurial ventures.

Economic displacement

This concerns with economic variations of recession and depression, job loss, capital
shrinkage or simply 'bad times' can create the foundation for entrepreneurial pursuit.

MICRO VIEW

This examines the factors that are specific to entrepreneurship and are part of the internal
locus control. The potential entrepreneur has control to adjust the outcome of each major
influence in this view.

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The micro view contains three schools of thoughts; Entrepreneurial trait school of thought,
The venture opportunity school of thought and The strategic formulation school of thought.

Entrepreneurial trait school of thought

This advocates that successful entrepreneurs tend to exhibit similar characteristics and if
coped would increase success opportunities for the emulators. Factors as achievements,
creating determination and technical knowledge are usually exhibited by successful
entrepreneurs.

Family development and education incubations are also examined. Some researchers
argues against educational development because they inhibit the entrepreneur's creative
and challenging nature. Others argued that new education development is on the increase
because they have been found to aid entrepreneurial development.

The family development idea focuses on the nurturing and support that exist within the
home atmosphere of an entrepreneurial family.

The venture opportunity school of thought

This focused on the opportunity aspect of venture development. The search for idea
sources, the development of concepts, and the implementation of venture opportunities are
all important interest areas for this school.

The school says, developing the right idea at the right time for the right market is the key to
the entrepreneurial success.

Another development is related to corridor principle. New opportunity will arise the lead
entrepreneurs, in different directions, the ability to recognise these opportunities when
they arise and to implement the necessary step for action are the key factors. The proper
preparations in the interdisciplinary business segments will enhance the ability to
recognise business ventures.

The strategic formulation school of thought

This emphasized the planning process in successful venture development. This approach
views strategic formulation as leveraging of unique elements.

Unique markets: This involves identifying major market segments as well as market that
arise from larger markets.

Unique people: Refers to skills, special talents of one or more individuals around whom
the venture is built.

Unique products: Refer to innovations that encompass new or existing markets.

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Unique resources: Refers to the ability and special resources (land, labour etc) as a
competitive advantage against others over the long term.

PROCESS APPROACH

The process approach is another way of studying the entrepreneurship concepts. The
approach has three traditional processes; Entrepreneurship events approach,
Entrepreneurial assessment approach and Multidimensional approach.

Entrepreneurship events approach

Entrepreneurship is not a series of isolated activities, it is a process by which individuals

plan, implement and control the activities. The number of elements affects each event in
entrepreneurial process.

The entrepreneurial events approach focuses on the process of entrepreneurial activity

and include the following factors:

Initiative: An individual or group takes an initiative.

Organization: Resources are brought together to accomplish objectives.
Administration: Those who took the initiative take over management of the
organization.
Relative autonomy: The initiators assume relative freedom to dispose off and
distribute the resources.
Risk taking: The organization success or failure is shared by initiators, supervisors
and employees.
Environment: This includes opportunities, resources, competitors, etc that affect
the entrepreneurial events at different stages.

Entrepreneurial assessment approach

This stresses in assessment making qualitatively, quantitatively, strategically and ethically

in regard to entrepreneur, the venture and the environment.

To examine entrepreneurship, the results of assessment of these variables must be

compared to the stage of entrepreneurial career, early, mid or late career. This was termed
as entrepreneurial perspective.

Multidimensional approach

In this view, entrepreneurship is a complex, multidimensional framework that emphasizes

the individual, environment, the organization and the venture process.

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OPPORTUNITY:

This is the favourable circumstances to the firm. It is the exploitable set of circumstances
with uncertain outcome, requiring commitment of resources and involving exposure to
risk.

The opportunity emerges at the nexus of individual aspiration with economic and social
conditions perceived as favourable to create a new product or service in existing or new
market.

Preliminary information in searching business opportunity

Cost structure of the opportunity: what does it cost?

Market structure: who are the dominant players in the market?

Technology: is there any change in the recent technology?

Human resource issues: what strategies to attract good team can be used?

Government regulations: is there any barrier from the government towards pursuing the
opportunity?

SOURCES OF GLOBAL OPPORTUNITY TO ENTREPRENEURS

Economic integration or associations: Economic integration like EAC, European Union etc
can form opportunity to its members and partner states.

Growing international demand of products and services: it gives the opportunity to

entrepreneurs with requisite capabilities to satisfy the growing demand.

Revision of foreign regulations and laws eg lowering of export or import tariff, lift of
import/export barrier etc.

Development of technology: Facilitate mobile trade and transaction eg e-commerce, online

transactions etc.

Development in communication and transport infrastructures that link various

international destinations. It increases access to information on international opportunity.

Changes in life styles and living or working conditions. Foe example holiday experiences
and life style in European and American countries have opened great opportunities in
tourism industry in African countries.

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REACTIVE REASONS PUSHING ENTREPRENEURS TO PURSUE
INTERNATIONALIZATION STRATEGY.

a. Desire to respond to demand of products/services in the foreign country

b. Decision of following its key competitor in international market
c. Regulation, business environment or work safety may be easier or convenient in
overseas market hence attract internationalization decision.
d. Changes in any of the external forces (macro-environmental factors) such as political,
technology, demography.

METHODS OF GOING INTERNATIONAL

The choice of a method to use entering the market depends on the organization needs and
risk willing to be taken. Some of the ways are:

Importing

This is buying and shipping foreign goods for domestic consumption. Countries do
importation for different reasons such as:

a. Cheaper than producing at home

b. Some products cannot be domestically produced
c. Rising cost of labour, material and energy at home makes uncompetitive to produce

d. Lower capital needed compared to the production investment

Exporting

This is the shipping from domestic to abroad for consumption. This is the method of
increasing the market of the venture though it takes some times to be profitable.

Strategies which can be used during exportation:

a. Market differentiation through competitive pricing or brand identification.

b. Focus strategy involving special products for particular customers
c. Achieving technological superiority of certain product
d. Product oriented emphasis, using elements of customer service and high quality

Exporting may be of different strategies as follows:

Exporting management company: This is the use of private company that serves as
export department for several manufacturers. The company solicits and transacts export
business on behalf of its client in return of commission.

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Freight forwarders: This is the business that handles export shipments in return for
compensation. They start from preparing necessary documents, quotes inland and ocean
shipping costs and advice requirements eg on international packaging.

Joint venture:

This is when two or more firms pool their resources and create a new entity to undertake
productive economic activities.

Advantages

 Gaining of intimacy of local conditions and government where the facility is located
 Each participant is able to use the resources of the other firm involved in the venture.
 Both the initial capital and overall risk would be lower than if the firm were setting up
the operation alone
 It is a powerful tool for growth in international markets as it can effectively combine
the strengths of partners.

Disadvantages

a. Problem of fragmented control; Decisions are coming from two partners, if one of
them is unwilling to undertake any beneficial opportunity, the other partner cant.
b. Local counterpart may claim more share than the foreign.

Direct foreign investment:

 This is the domestically controlled foreign production facility. The firm can make
direct investment by several methods.
 Acquire an interest in on-going foreign operation.
 Acquiring firm may purchase part of assets of foreign concern in order to establish a
direct investment.
 The firm may decide to build the facility in the foreign country

Reasons of using direct investment strategy

Some countries have some prohibitions or restrictive trade barriers on imports of

certain goods.
Foreign governments may grant tax incentives for a firm seeking direct investment
in the country.
Enable the company to utilize the specialized skills of local experts
Require low initial capital outlay
Reduce transportation costs to market places

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 Gain entry into neighbouring markets

Licensing

Is the business arrangement in which the manufacturer grants permission to other

individuals to manufacture that product in return for specified royalties or other payments.

Under such arrangement, an entrepreneur need not to make an extensive capital outlay to
participate in international market, Nor does the licenser need to be concerned with the
daily production, marketing, technical or management requirements; the licensee will
handle all of this.

The foreign firm merely looks for the domestic firm for expertise and perhaps an
opportunity to sell a product owned by the licenser.

Advantages

Is an attractive way to enter international area

It is more realistic form of expansion than exporting particularly in high tech firm
Access to market is easier compared to equity investment
Potentials exist for licensee to become partner and contributor in improving the
learning curve of technology.

Disadvantages

The licensee will become competitive after the contract expires

The license must get the licensee to meet constructional obligation and to adjust
product to fit licensee market
The licensing entrepreneur must manage relationship conditions and circumstances
as well as resolve conflicts or misunderstanding as they occur
Integrity and independence of both licensor and licensee must be maintained
Management contracts(A case of NETGROUP and City Water in Tanzania)

Companies with abundant management techniques and management skills contract their
personnel to run a turnkey project where the foreign owner wants to maintain the
management of the turnkey supplies at a fee.

It allows the purchasing country to gain foreign management expertise without turning
ownership of its resources over a foreigner
To supplier of management contract it is another way of entering into a foreign market
It’s another way of reaping a profit without the need of large equity investment.

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