Global

Business
Chapter-2
 What is exporting
Exporting is simplest and widely used mode of entering international
markets.
Merits of
exporting
• Need for limited finance
• Less risk
• Motivation for exporting
Exporting
Intra-corporate transfers

Intra-corporate
transfers are selling of
products by a company
to its affiliated
company in the host
country. Selling of
products by Hindustan
Lever in India to
Unilever in USA.
 • The company should consider government
policies like export policies, import policies,
export financing, foreign exchange etc.
• Marketing factors like image, distribution
Factors to be networks, responsiveness to the customer,
customer awareness and preferences
considered
• Logistical consideration: This includes
while physical distribution costs, warehousing
exporting costs, packaging, transportation, inventory
carrying costs etc.
• Distribution issues: These include
distribution networks, networks of host
country’s companies
 Export
intermediaries
 • 1. Export Management
companies: They act as
export department of
the exporting firm(its
client). These
companies act as
commission agents for
exports or they take
title of the goods.

Types of export
intermediaries
• 2. Cooperative society: The
domestic company desire to
export the goods form a
cooperative society, which
undertakes exporting
operations of its members.
• 3. International trading
company: The company
is engaged in directly
exporting and
importing. It buys the
goods from domestic
companies and exports.
Therefore the
companies can export
their goods by selling
them to international
company.
• 4. Manufacturers Agents:
They work on commission
basis. They solicit domestic
orders for foreign
manufacturers.
• 5. Manufacturers
export agents: These
agents also work on
commission basis. They
sell the domestic
manufacturers products
in the foreign markets
and act as their foreign
sales department.
• 6. Export import brokers: The brokers
bridge the gap between exporters and
importers and bring these two parties
together.
• 7. Freight forwarders:
They help the domestic
manufacturers in
exporting their goods by
performing various
functions like physical
transportation of good ,
arranging customs
documents and by
arranging
transportation services.
 Basic issues in licensing
1. Boundaries of the agreement
The companies should clearly define the
boundaries of the agreements. They
determine which rights and privileges are
being conveyed in the agreement
2. Determination of royalty
The most important factor in deciding the
license is the royalty. Licensor expects high
rate of royalty while the licensee will be
unwilling to pay much royalty. However
both the parties will negotiate for a fair
royalty from both the sides in order to
implement the contract.
 3. Determining rights privileges and constrains: It
is important to clearly specify the rights and
privileges in licensing agreement for both the
parties. The licensor does this to make sure that
his firms image is not being damaged by the
licensee.
Basic issues 4. Dispute settlement mechanism: As
in licensing settlements in courts is costly, time consuming
and also hinders the business interests, it is
important that the licensee and licensor clearly
mention the dispute settlement mechanism.
4. Agreement duration: The two parties specifies
the duration of the agreement. Licensing cannot
be a short term strategy.
 Advantages and disadvantages of licensing
Advantages
• Low investment on the part of licensor
• Low financial risk for licensor
• Licensor can investigate the foreign markets without
much efforts
• Licensee gets benefits with less investment on R & D
• Licensee escapes himself from the risk of product
failures
Disadvantages
• Licensing agreements reduce the market
opportunities for both parties
• Both parties are responsible to maintain product
quality and promoting the product
• Costly and tedious litigation may crop up and hurt
both parties and the market
• Scope for misunderstandings between the parties
• Problem of leakage of trade secrets of licensor
• The licensee may develop his reputation
• Licensee may sell the products outside the territory
and after the expiry of the contract
 International Franchising
Franchising is a form of licensing. The franchisor can
exercise more control over the franchised compared to
that of licensing.
Under franchising, an independent organisation called
franchisee operates the business under the name of
another company called franchisor. The franchisor
provides the following services to the franchisee.
• Trade marks
• Operating systems
• Product reputations
• Continuous support systems like advertising,
employee training, reservation services, quality
assurance programs etc.
Important items in franchising agreement

Franchisee has to pay a fixed amount and royalty based on the sales to franchisor.

Franchisee should agree to follow franchisors requirements like appearance,

financial reporting, operating procedures, customer service etc.

Franchisor helps franchisee in establishing the manufacturing facilities, services

facilities, provides expertise, advertising, corporate image etc.

Franchisor allows franchisee some degree of flexibility in order to meet the local
tastes and preferences.
Advantages and disadvantages of franchising
Advantages Disadvantages

• Franchisor can enter global markets with low • International franchising is more complicated than
investment and risk the domestic franchising
• Franchisor gets information regarding the markets, • Difficult to control International franchisee
culture, customs and environment of the host
country
• Franchisor learns more lessons from the • Franchising agents reduce the opportunities for
experiences of the franchisees which he could not both franchisor and franchisee
experience in the home country’s market
• Franchisee can also start a business with low risk as • Both parties have the responsibility to maintain
he selects and established and proven product and product quality and product promotion
operating system
• Franchisee gets the benefit of R & D for low cost • Scope for misunderstanding between both parties

• Franchisee escapes from the risk of product failure • There is a problem of leakage of secrets
Advantages and disadvantages of contract
manufacturing
Advantages Disadvantages

• International business can focus on the part of the • Host country’s companies may take up the
value chain where it has distinctive competence marketing activities also , hindering the interests of
international company

• It reduces the cost of production as host country’s • Host country’s companies may not strictly adhere
companies with their relative cost advantage to the production design , quality standards etc.
produce at low cost

• Small and medium industrial units in the host • The poor working conditions in the host country’s
country can also develop as most of the production companies affect the company’s image
activities take in these units

• The international company gets the locational

advantages generated by the host country’s
production.
 The companies with low level technology and
managerial expertise may seek the assistance of a
foreign company. Then the foreign company may
agree to provide technical assistance and managerial
expertise. This agreement between these two
companies is called management contract.
A management contract is an agreement between
two companies, whereby one company provides
Management managerial assistance, technical expertise,
contracts specialised services to the second company of the
agreement for a certain agreed period in return for
monetary compensation. Monetary compensation
may be in the form of :
• A flat fee
• Percentage over sales
• Performance bonus based on profitability, sales
growth, production or quality measures.
 • Sometimes the companies allow the
companies in the host country even to use
their trade marks and brand name. The host
Disadvantage country’s companies spoil the brand name, if
they do not keep up the quality of product
s services.
• The host country’s companies may leak the
secrets of technology.
The forms of
remuneratio
n
include

1. A flat fee
2. Payment on
cost plus
method
The general definition for turnkey, is a product or service that is designed, supplied, built, or installed fully complete
and ready to operate; the contractor or provider undertakes the entire responsibility from design through completion
and commissioning. The term implies that the end user just has to turn a key and start using the product or service.
Turnkey Projects or operations are common in international business in supply, erection and commissioning of plants.
Turnkey operations are a type of collaborative arrangement in which one company contracts with another to build
complete, ready-to-operate facilities.
Turnkey operations are generally done in the areas of industrial equipment manufacturing and construction. The
customer for a turnkey operation is often a government agency.
 Some companies enter the foreign markets
through exporting, licensing, franchising etc,
Foreign get the knowledge and awareness of the
foreign markets, culture of the country,

Direct
customers preferences, political situation of the
country etc, and then establish manufacturing
facilities by ownership in the foreign countries.

Investment
without Companies which enter the international
markets through foreign direct investment

alliance
invest their money, establish manufacturing
and marketing facilities through ownership and
control.
 Advantages and disadvantages of FDI
Advantages Disadvantages

The customers of the host country mostly prefer the FDI exposes the company to the host country’s economic
products produced in their country. Be American buy and political risks
American
Purchase managers of most of the companies prefer to buy FDI exposes the company to the exchange rate fluctuations
local production in order to ensure certainty of supply, faster
services, quality dependability and better communication
with supplier
The company can produce based on the local environment Some countries discourage the entry of foreign companies
and changing preferences of the customers through FDI in order to protect the domestic industry
Changing Government policies of the host country may
create uncertainties to the company.

Host country Governments, sometimes ban the acquisition

of local companies by foreign companies, impose
restrictions on repatriation of dividends and capital.
Greenfield strategy

The company
• Conducts the market survey,
• Selects the location,
• Buys or leases land,
• Creates the new facilities,
• Erects the machinery,
• Remits or transfers the human
resources and
• Starts the operations and
marketing activities.
 Advantages and disadvantages of greenfield
strategy
Advantages
The company selects the best location from all
viewpoints.
The company can avail incentives, rebates and
concessions offered by the host government including
local government
The company can have latest models of buildings,
machinery and equipment technology
The company can have its own policies and styles of
HRM
The company can have its gestation period to
understand and adjust to the new culture of host
country. Thus can avoid cultural shock.
Disadvantages
Results in longer gestation period as the successful
implementation takes time and patience.
Some companies do not get the land in the location of
their choice
The company has to follow rules and regulations
imposed by host country government in case of
construction of factory buildings.
Host country’s govt may impose conditions that the
company should recruit local people and train them, if
necessary to meet the company’s requirements.
Foreign Direct Investment with strategic alliance
Strategic alliance is a co-
operative and collaborative
approach to achieve the larger
goals. Alliance is a strategy to
explore a new market which
the companies individually
cannot do. Innovations,
creations, productivity,
growth, expansions and
diversifications, in the recent
years are mostly established
by strategic alliances adopted
by various companies like
mergers, acquisitions and joint
ventures.
Mergers and acquisitions

Domestic companies enter international business

through mergers and acquisitions. A domestic company
selects a foreign company and merges itself with the
foreign company in order to enter international
business.

Alternatively, a domestic company may purchase the

foreign company and acquire its ownership and
control.
Mergers and acquisitions (M&A) is a general term that describes the consolidation of companies or assets through
various types of financial transactions, including mergers, acquisitions, consolidations, tender offers, purchase of assets,
and management acquisitions.
The term M&A also refers to the desks at financial institutions that deal in such activity.

•The terms "mergers" and "acquisitions" are often used interchangeably, but they differ in meaning.
•In an acquisition, one company purchases another outright. Tata acquired Air India
•A merger is the combination of two firms, which subsequently form a new legal entity under the banner of one
corporate name. Aaksash-Byjus
•A company can be objectively valued by studying comparable companies in an industry and using metrics.

Eg. of acquisition: Manulife Financial Corporation's 2004 acquisition of John Hancock Financial Services, wherein both
companies preserved their names and organizational structures.

Eg. of merger: Both Daimler-Benz and Chrysler ceased to exist when the two firms merged, and a new company,
DaimlerChrysler, was created. Both companies' stocks were surrendered, and new company stock was issued in its
place.
Advantages and disadvantages of acquisition
strategy
Advantages Disadvantages

The company immediately gets ownership and Acquiring a firm in foreign country is a complex task
control over the acquired firm’s factories employees, involving bankers, lawyers, regulations, mergers and
technology, brand names and distribution networks acquisition specialist from two countries

The company can formulate international strategy This strategy adds no capacity to the industry
and generate more revenues

If the industry already reached the stage of optimum Sometime home countries impose restrictions on
capacity level or over capacity level in the host acquisition of local companies by the foreign
country, then this strategy helps the economy of the companies
host country

Labour problems of host country’s company are also

transferred to the acquired company
Joint ventures
Two or more firms join together to create a new
business entity that is legally separate and distinct
from its parents. Joint ventures are established as
corporations and funding partners in predetermined
positions. They involve shared ownerships. Various
environmental factors like social, technological,
economic and political encourage the formation of
joint ventures. Joint ventures provide strength in
terms of required capital, latest technology, required
human talent etc. and enable the companies to
share the risks in the foreign markets.