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How Firms Engage in International Business

1. International trade

It refers to the exchange of products and services from one country to another. In
other words, imports, and exports. International trade consists of goods and services
moving in two directions:

 Imports: Flowing into a country from abroad

 Exports: Flowing out of a country and sold overseas

Example: Volkswagen

2. Licensing

It is defined as a business arrangement, wherein a company authorizes another

company by issuing a license to temporarily access its intellectual property rights,
manufacturing process, brand name, copyright, trademark, patent, technology, trade
secret, etc. for adequate consideration and under specified conditions. The firm that
permits another firm to use its intangible assets is the licensor and the firm to whom
the license is issued is the licensee. A fee or royalty is charged by the licensor to the
licensee for the use of intellectual property right.

For example: Under licensing system, Coca-Cola and Pepsi are globally produced
and sold, by local bottlers in different countries. In finer terms, it is the simplest form
of business alliance, wherein a company rents out its product-based knowledge in
exchange for entry to the market.

3. Franchising

Franchising is an arrangement in which the franchisor gives the franchisee the right
to distribute and sell the franchisor’s goods or services and use its business name
and business model for a specified period, and possibly covering a geographical
area.

The franchisor is the owner of the business that provides the product/service, while
the franchisee is the person who receives the rights to use the franchisor’s business
name, model, etc.

Franchising exists in several forms. According to the Franchising Council of

Australia, the most common way franchising is identified is in the “business format
franchising”.
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In business format franchising the franchisee has the right to sell the franchisor’s
goods or services, but also uses the franchisor’s designs, quality control, training,
and benefits from his/her advertising and promotions, accounting systems, and
operating procedures.

Often the supplier of the franchisee’s goods or services is the franchisor. If it is a

hotel or travel agency business, the franchisee is also part of the franchisor’s
worldwide reservation system

Examples: Starbucks, McDonalds, Dominos, etc.

4. Joint Ventures

A joint venture is a business agreement between two or more companies and

business entities to achieve a specific goal by sharing resources. It usually results in
the form of new business activity. When businesses share assets, they also divide
income and expenses.

A joint venture is a separate entity completely different from its individual

businesses. For instance, if you’re planning to start a joint venture with any other
business, then you need to focus on how it works in terms of management and
taxation.

Every business or group of businesses in the business strategy would maintain a

separate legal status. A mutually agreed contract would define the resources like
assets, property, and money that every business member would bring in the venture.
The contract would also outline the division of profit, losses, and responsibilities.

A joint venture could be a type of alliance strategy of two completely different

businesses, and they plan to develop something new by sharing their separate
expertise. For instance, a business enters a new market and partners up with locally
established businesses to gain a competitive advantage.

Example: Volvo heavy vehicle manufacturer and Uber started a joint venture to work
on driverless technology. Both invested capital of 350 million dollars and both of
them had the ownership of 50%-50%.

5. Merge and Acquisitions

Mergers and acquisitions (M&A) are strategic alliances between two or more
companies. In mergers, companies join hands to create a new firm by pooling their
assets and resources. In acquisitions, however, one organization buys more than 51%
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shares of the other business entity. They are carried out for various reasons. First, M&A
improves the quality of corporate performance by reducing the redundant cost of
operations. Its other benefits include elimination of excess workforce, growth
acceleration, technology, and the procurement of new talent. By merging or acquiring
firms, companies overcome competition, attain economies of scale, acquire
a monopoly, and multiply profits.
The disadvantages cannot be overlooked either. It involves a significant level of risk—
acquisitions are expensive. Such changes in ownership can adversely impact a firms’
stock prices. Cultural difference is a huge hurdle—newly formed teams always take time
to work smoothly. The overvaluation of a target firm can result in huge losses. In M&As,
many employees lose their jobs—due to the duplicity of roles.

Example: Google and Android. Google is the master company in the IT industry and
search engine, whereas Android was a start-up company struggling to exist in the
mobile phone market. Android was also not much known in the telecom or IT industry.
Hence, Android was taken over by Google for $50 million. At that time, Microsoft led the
market due to its Apple iPhone and Windows mobile products. After the acquisition of
Android by Google, 54.5 Percent of U.S Smartphone Subscribers became users of
Google Android devices. The report was based on the May 2018 data.

In this example, the small company Android was taken over by large company Google
to meet the competitive edge, which Windows created from its products like iPhone and
Windows Mobile.

6. Subsidiaries

A parent company buys or establishes a subsidiary to provide the parent with

specific synergies, such as increased tax benefits, diversified risk, or assets in the form
of earnings, equipment, or property. Still, subsidiaries are separate and distinct legal
entities from their parent companies, which reflects in the independence of their
liabilities, taxation, and governance. If a parent company owns a subsidiary in a foreign
land, the subsidiary must follow the laws of the country where it is incorporated and
operates.

However, given their controlling interest parent companies often have considerable
influence with their subsidiaries. They—along with other subsidiary shareholders, if any
—vote to elect a subsidiary company's board of directors, and there may often be a
board-member overlap between a subsidiary and its parent company.
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The purchase of an interest in a subsidiary differs from a merger: The purchase usually
costs the parent corporation a smaller investment, and shareholder approval is not
required to turn a company into a subsidiary as it would be in the event of a
merger. Nor is a vote required to sell the subsidiary.

To be designated a subsidiary, at least 50% of a firm's equity must be controlled by

another entity. If the stake is less than that, the firm is considered an associate or
affiliate company. When it comes to financial reporting, an associate is treated
differently than a subsidiary.

Example: Facebook is a popular company in the digital industry. It has various

subsidiaries acquired from time to time. Instagram is a photo-sharing application
acquired by Facebook in April 2012. It also acquired WhatsApp – a popular messaging
application, in 2014. Lastly, in March 2014, It bought shares of a virtual reality company,
Oculus.

References:
Wall Street mojo Editorial Team. (2020). International Trade. August 22, 2022, de
Wall Street Mojo Sitio web: https://www.wallstreetmojo.com/international-trade/#h-
examples

Bhasin, H. (2020). What is Licensing? Definition, Types and Examples. August 22,
2022, de Marketing91 Sitio web: https://www.marketing91.com/licensing/

Anonymous. (2018). Franchising. August 22, 2022, de Toppr Sitio web:

https://www.toppr.com/guides/business-environment/emerging-trends-in-business/
franchising/#:~:text=Franchising%20is%20a%20business%20marketing%20strategy
%20to%20cover,Dominos%20and%20McDonalds%20operate%20in%20India
%20through%20franchising.

Chen, J. (2020). Subsidiary Definition. August 22, 2022, de Investopedia Sitio web:
https://www.investopedia.com/terms/s/subsidiary.asp