DOING BUSINESS IN INDIA:

UNIT - 2
Factors Considered to enter Foreign
Market:
1. Country Specific Factors
2. Industry Specific Factors
3. Organization Specific Factors
4. Project Specific Factors

Country Specific Factors: (China)

a) Laws and Regulations of the Country
b) Infrastructural Conditions
c) Property Rights and Legal Framework
d) Political Framework
e) Cultural Framework
Contd..
Industry Specific Factors:
a) Entry / Exit Barriers
b) Industrial Complexity
c) Uncertainty in Industrial Environment
d) Supply and Distribution Pattern

Organization Specific Factors:

e) Resources of the Firm
f) Technological Risk
g) Goals and Objectives of the Firm
h) Experience of the Firm

Project Specific Factors:

i) Size of the Project
j) Project Orientation
k) Availability of Raw material and Labour
l) Availability of Suitable Market
Modes of Entry into the Foreign
Market:

1. Exporting
2. Licensing
3. Franchising
4. Contract Manufacturing
5. Turn-Key Projects
6. Mergers and Acquisitions
7. Joint Ventures
8. FDI – Foreign Direct Investment
1. Exporting
• It means the sale of an item in a foreign country, stored
or processed in the supplying firm’s home country. It is a
convenient method to increase the sales.
• Passive exporting occurs when a firm receives canvassed
item. (export when order is received).
• Active / Aggressive exporting conversely results from a
strategic decision to establish proper systems for
organizing the export functions and for procuring foreign
sales.
• E.g. Indian Gems and Jewellery
 Contd..
Advantages Of Exporting:
1. 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. 

2. Less Risks
Exporting involves less risk as the company understand the culture ,
customer and the market of the host country gradually.

3. 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.
2. 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.

• E.g.
1. Starbucks (Licensor – Baked Coffee Beans) – Nestle (Licensee)
2. Batman (Licensor - pic) – Lego (Licensee)
Contd..
Advantages:
1. Low investment on the part of licensor.
2. Low financial risk to the licensor 
3. Licensor can investigate the foreign market without much efforts on his
part.
4. Licensee gets the benefits with less investment on research and
development
5. Licensee escapes himself from the risk of product failure.

Disadvantages:
6. It reduces market opportunities for both
7. Both parties have to maintain the product quality and promote the product .
8. Chance for leakages of the trade secrets of the licensor.
9. Licensee may develop his reputation.
10.Licensee may sell the product outside the agreed territory and after the
expiry of the contract
3. 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.
Contd..
Advantages:
1. Low investment and low risk 
2. Franchisor can get the information regarding the market culture,
customs and environment of the host country.
3. Franchisor learns more from the experience of the franchisees.
4. Franchisee get the benefits of R& D with low cost.
5. Franchisee escapes from the risk of product failure.

Disadvantages
1. It may be more complicating than domestic franchising.
2. It is difficult to control the international franchisee.
3. It reduce the market opportunities for both
4. Both the parties have the responsibilities to maintain product quality
and product promotion.
5. There is a problem of leakage of trade secrets.
4. Contract manufacturing
• Contract manufacturing in international markets is used in
situations when one company arranges for another company
in a different country to manufacture its products; this is
also known as international subcontracting or international
outsourcing.

• E.g. Foxconn HKG (Apple)

The Benefits of Contract
Manufacturing
Cost savings:
Companies can achieve savings by contracting with a manufacturer that
already has knowledge of the manufacturing process, has invested in the
appropriate equipment and runs similar but non-competing products in its
facility, to take advantage of economies of scale.
More focus on core competencies:
Contract manufacturing frees up people at the hiring firm to stay focused
on their strengths or core competencies of selling and marketing.
Easier market entry:
You may have barriers to entry in China for goods coming from, but your
product can be made there inexpensively and re-exported to all
contiguous countries. 
Distribution:
Find out if the contract manufacturer can drop-ship your product directly
to customers everywhere or even to a specified geographic area.
Risks of Contract Manufacturing:
• Lack of Control:
When a company signs the contract allowing another company to
produce their product, they lose a significant amount of control over
that product.
• Relationships:
It is imperative that the company forms a good relationship with its
contract manufacturer. The company must keep in mind that the
manufacturer has other customers.
• Quality concerns:
When entering into a contract, companies must make sure that the
manufacturer’s standards are congruent with their own. They should
evaluate the methods in which they test products to make sure they are
of good quality.
Contd..
• Outsourcing Risks:
Although outsourcing to low-cost countries has become very popular, it
does bring along risks such as language barriers, cultural differences
and long lead times. This could make the management of contract
manufacturers more difficult, expensive and time- consuming.

• Capacity Constraints:
If a company does not make up a large portion of the contract
manufacturer’s business, they may find that they are de-prioritized
over other companies during high production periods. Thus, they may
not obtain the product they need when they need it.
 5. Turnkey Project
• 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 a 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.
• Hence they are multiyear project.
• E.g. nuclear power plants, airports, oil refinery, national highways,
railway line etc.
Characteristics:

1. The overall obligation assumed by the contractor to

the client to deliver a fully equipped work.

2. A project in perfect working.

3. One contract between the client and the contractor.

4. The contractor assumes the full implementation of

the work.
Contd..
Advantages:
1. Contractual relationships with one person.
2. Contractors responsibility forces him to give a good result.
3. The contractor has a fixed price.
4. Eliminates the extra expenses.

Disadvantages:
5. The price is high.
6. The client can´t intervene in the project.
7. It is sometimes difficult to find specialists for specific
projects.
8. Control is difficult.
 6. Mergers & Acquisitions
• Mergers and acquisitions (M&A) are defined as consolidation of
companies.
• A domestic company selects a foreign company and merges itself
with foreign company in order to enter international business.
Alternatively the domestic company may purchase the foreign
company and acquires its ownership and control.
• Mergers is the combination of two companies to form one, while
Acquisitions is one company taken over by the other.
• The reasoning behind M&A generally given is that two separate
companies together create more value compared to being on an
individual stand.
• With the objective of wealth maximization, companies keep
evaluating different opportunities through the route of merger or
acquisition.
• E.g. Merger – Flipkart and Walmart
Mergers & Acquisitions can take place in the following
ways:
• By purchasing assets
• By purchasing common shares
• By exchange of shares for assets
• By exchanging shares for shares
Types of Mergers and Acquisitions:
Horizontal merger:
A merger between companies that are in direct competition with each other in terms of
product lines and markets (Idea and Vodafone in India)

Vertical merger:
A merger between companies that are along the same supply chain (e.g., a retail
company in the auto parts industry merges with a company that supplies raw materials
for auto parts.) (Lays Chips with Farmers)

Market-extension merger:
A merger between companies in different markets that sell similar products or services
(Flipkart and Walmart)

Product-extension merger:
A merger between companies in the same markets that sell different but related
products or services (Mc Donalds and Goli Vada Pav)

Conglomerate merger:
A merger between companies in unrelated business activities (e.g., a  clothing company
buys a software company)
Advantages

1. The company immediately gets the ownership and control over

the acquired firm’s factories, employee, technology ,brand name
and distribution networks.
2. The company can formulate international strategy and generate
more revenues.
3. 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:

1. Acquiring a firm in a foreign country is a complex task

involving bankers, lawyers regulation, mergers and
acquisition specialists from the two countries.
2. This strategy adds no capacity to the industry.
3. Sometimes host countries imposed restrictions on
acquisition of local companies by the foreign companies.
4. Labour problem of the host country’s companies are also
transferred to the acquired company.
7. 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.
Serial Merger
No.
1 A merger occurs when two firms,
usually equal in size decide to
continue business as a single firm
rather than being owned and operate
as separate entities.
2 larger commitment that is
permanently put in place.
3 Mergers are perfect when majority of
the two businesses overlap, and they
can perform most of their business
operations as one entity
4 Mergers are formed on a long term
basis for permanent projects.
Joint Venture
In a joint venture, the two
companies will separately exist
on their own, and a new separate
entity may be formed for the
particular division or new
business venture.
A joint venture requires less
commitment than a merger
joint venture is formed when two
firms do not have such large
overlaps and similarities and only
have one specific area in which
they can work together
successfully.
Joint ventures can also be
formed on a short term basis for
short projects.
Examples of Joint Ventures:
• Vodafone & Telefónica agreed to share their mobile network
• BMW and Toyota co-operate on research into hydrogen fuel
cells, vehicle electrification and ultra- lightweight materials
• West Coast – joint venture between Virgin Rail & Stagecoach
• Google and NASA developing Google Earth
• Hollywood studios combining to fight internet piracy
• Alliances in airline industry e.g. Star Alliance and One World
• Renault-Nissan
• Docklands-Light Railway - a joint venture between French
transport group Keolis and infrastructure services provider
Amey, part of Spanish multinational Ferrovial.
• Banks collectively funding research to prevent cyber-crime
Advantages

1. Joint venture provide large capital funds suitable for major

projects.
2. It spread the risk between or among partners.
3. It provide skills like technical skills, technology, human
skills ,expertise , marketing skills.
4. It make large projects and turn key projects feasible and
possible.
5. It synergy due to combined efforts of varied parties.
 Disadvantages:

1. Conflict may arise

2. Life cycle of a joint venture is hindered by many causes of
collapse.
3. Scope for collapse of a joint venture is more due to entry
of competitors changes in the partners strength.
4. The decision making is slowed down in joint ventures due to the
involvement of a number of parties.
8. FDI
• Foreign Direct Investment involves a company entering an overseas
market by making a substantial investment in the country.
• This strategy is viable when the demand or the size of the market,
or the growth potential of the market in the substantially large to
justify the investment.
• Some of the reasons because of which companies opt for foreign
direct investment strategy as the mode of entry into international
business can include:
1) Restriction or import limits on certain goods and products.
2) Manufacturing locally can avoid import duties.
3) Companies can take advantage of low-cost labour, cheaper
material.
Advantages and Disadvantages of FDI:
Advantages of Foreign Direct Investment:
1) You can retain your control over the operations and other aspects of
your business
2) Leverage low-cost labour, cheaper material etc. to reduce
manufacturing cost towards obtaining a competitive advantage over
competitors
3) Many foreign companies can avail for subsidies, tax breaks and other
concessions from the local governments for making an investment in
their country

Disadvantages of Foreign Direct Investment:

4) The business is exposed to high levels of political risk, especially in case
the government decides to adopt protectionist policies to protect and
support local business against foreign companies
5) This strategy involves substantial investment to be made for entering an
international market
Outsourcing
• Outsourcing means delegating a portion of business
operations or a process to a third-party.
• Most outsourced processes revolve around non-essential,
peripheral activities.
• While it’s often associated with commissioning work to an
overseas partner, the location of the outsourcing company
can be the same as the company looking to hire.
Benefits of Outsourcing

Reduce Costs:
• Companies often seek to outsource to obtain cheaper services and
still retain high quality. Hiring in-house specialists generate
overhead and additional costs associated with the hiring process.

Access to Specialized Talent:

• By outsourcing highly specialized tasks to a third-party provider, a
company can gain access to innovative solutions and technologies at
a fraction of the cost compared to setting up the process and
technology in-house.

Increased Efficiency:
• By outsourcing work to experts, you’re eliminating the period
necessary to train employees and familiarize them with the project.
Drawbacks:
Intellectual Property Risks:
• When companies outsource, they usually share proprietary information
regarding business operations with a third-party provider. Doing a due
diligence check of a potential contractor it’s one of the necessary steps
when considering outsourcing any business processes.

Communication Issues:
• Depending on the location of the outsourcing partner, effective
communication could potentially be problematic. If the contractor is
located in a different time zone, time gaps can make real-time
communication cumbersome.

Less Control:
• Because you’re delegating work to another company, you have less control
over the execution, which can cause minor discrepancies in how the goals
are reached.
Offshoring:

• Offshoring means relocating some business processes or

operations to a different geographical location. While it’s
unusual for companies to outsource their core activities,
offshoring crucial operations are quite common.

• One of the biggest perks of offshoring is that the work is still

performed within one company, which holds sole control over
how something is done.
Advantages of Offshoring:
Lower Cost:
• Offshoring offers companies an opportunity to hire specialized talent or to
produce goods at a cheaper price.

Lighter Regulations:
• Some countries make it easier for manufacturers or companies to conduct
business by having lighter regulations. Offshoring core activities can thus involve
fewer production restrictions, allowing organizations to deliver services or
products according to plan.

Taxes and Tariffs:

• Taking advantage of tax and tariff relief present in some countries offers
companies significant cost-saving opportunities.

Higher Control:
• By choosing to offshore operations rather than outsource them, companies
retain full control over their internal processes. Strictly adhering to the
execution of critical business operations is often crucial to meet business
objectives.
Disadvantages of Offshoring:

Cultural and Social Differences:

• Cultural customs can have a noticeable impact on operations
conducted in an offshoring location. For example, public holidays
that occur on different days than those in a domestic country can
result in days-long delays in production or delivery of services.

Quality Check:
• Companies offshoring their operations can usually expect to have
more control over the production. However, many factors can still
influence the quality of the finished product or delivered service,
even if the offshore location follows guidelines and
recommendations.
Types of Offshoring:
Production Offshoring

When a company establishes its manufacturing unit in a different country,

to import the finished goods for selling it in the domestic market, it is
termed as production offshoring.

For instance; a company manufacturing heavy machinery would set up its

production unit in a country where it has an optimum supply of iron, and
the local labour is cheap and skilled in such a task.
Service Offshoring

A company performs service offshoring by setting up the units in other

countries to carry out service-related operations such as customer care,
information technology, marketing, human resource, accounting, sales and
many more.

For instance; a software company relocates its research and development

unit in a country where the technical human resources are highly competent
and comparatively cheaper than the domestic personnel.