Chapter 3

International Business Operations

 INTRODUCTION

International business operations cover a range of

activities
•Export transactions
•Foreign direct investment
•Foreign portfolio investments
 INTRODUCTION
Some of these operations are oriented toward the
production and marketing of goods and services, and
some are financially oriented and deal with the cross-
border movement of funds. These activities are
•Importing and exporting
•Contract manufacturing
•Licensing and franchising
•Turnkey system
•Management contracts
•Strategic alliances
•foreign direct investment in joint ventures and wholly
owned subsidiaries
A BREAKDOWN OF INTERNATIONAL
BUSINESS OPERTIONS
Corporations engage in a number of these activities to
maximize market opportunities and to capitalize on
transport, production cost, taxes and risk factors
 Exporting
• Smaller firms begin to sell their products
internationally through exporting
• Exporting is both function and goal
• Multinational corporations today no longer treat
exporting as a revenue-producing function but it is a
considered a part of to achieve broader goals and
objectives
• Companies are more interested in global market
share targets and exporting may or may not play a
significant role
 Exporting

Rapid Market Access Through Exporting

•Exporting is a simple way to establish business overseas
•Exporting doesn’t need huge investments
•Exporting can help companies achieve experience curves
and location economies
•It is a significant way to achieve economies of scale by
buying goods from one location and exporting them to
another
•In exporting switching to another industry is easier when
existing product lines achieve maturity
•The major disadvantage of export is importing market finds
another lower cost locations for manufacturing
 Exporting

Rapid Market Access Through Exporting

•Most companies are stubborn and continue producing
and exporting products from a company’s home country
without considering alternatives
•Most of the companies in China are reluctant to move to
another country
•Second disadvantage of exporting is the high transport
costs, national and regional trade restriction, which make
it uneconomical
•That’s why some companies are producing products on
American souls despite high labor cost to avoid
transportation cost and import tariffs
 Exporting

Export Trading Companies (ETCs)

•Export trading companies (ETCs) are very large
companies, whose principal sources of income are
derived from import export activities
•They are specialized in international trading of given
industries and commodity, and are highly knowledgeable
•Some ETCs are risk takers for taking the title of the
commodities they are selling worldwide in bulk, some
have exclusive arrangements with producer to handle,
selected product lines.
•ETC,S tend to concentrate their efforts on bulk
commodities, such as agriculture products, textiles,
petrochemical, raw materials
 Exporting
Direct Exporting to End Users
•Exporters have several option to enter foreign market,
one option is called direct end-user exporting. This
approach involves developing direct relationship with end-
users.
•Direct exporting allows the buyer and seller to bypass
local trade channels and agree on more flexible price and
payment arrangements
•Direct exporting is normally done for inexpensive and
over-the-counter (OTC) goods that can be easily
merchandise through magazines, newspaper or coupon
advertisements, and require payment by check or money
order credit card, etc
•Direct exporting is also done for technology products
where distribution or dealerships are not established
 Exporting
Direct exporting to end-users
•The major disadvantage of direct exporting is the absence
of after sale services such as warrantees or service
customer needs
•The absence of after sale services such as warranties or
services customer need is more apparent in high-
technological products such as electric appliances.
•The lack of well-trained distributor, dealer, or organization
is also a problem in direct exporting to end users
 Exporting
Exporting Through Foreign Import
Distributors
•Another approach for exporting finish good is to work
with local import, distributors or dealers. These
organizations or open affiliates of the exporter, such as a
licensee, joint venture, or a wholly owned subsidiary
•Distributors and dealers are different in terms of size,
distributors cover a larger area and are direct importers
compared with dealers, for example BMW
•Major advantages of exporting through overseas
distributor is the after sales services and financial, this is
important if the product involved are of a technical nature
 Exporting
Exporting Through Foreign Import
Distributors
•The financial advantage lies through exporting foreign
import distributor, as the export-manufacturer no longer
owns the good
•The only disadvantage of selling through overseas
distributor is they are totally independent, not in the
control of manufacturer
•Buying a product from an exporter means they have title
to the item
•Court decisions in the United States and elsewhere
tended to favor the rights of independent distributors and
dealers over manufacturers
 Exporting
Exporting Through Foreign Import Agents
•There is a difference between an import agent and import
distributor or dealers, is working on behalf of the principal
•An agent does not purchase goods from the principal, but
except good on consignment, means no sale is made from seller
to agent, a physical transfer of goods without a title change takes
place
•Title to the goods remains with the seller until the import agent
sells them to a customer
•Import agencies are important where manufacture products
require trademark, trade name, and territorial protection
•Manufacturer have totally control over marketing activities such
as price, selling strategy, and after sale services
 Exporting

Contract Manufacturing
•The best example of contract manufacturing is the Foxconn
manufacturing iPhones for Apple in China, and now in India,
large companies like Boeing often contract out parts and
components to smaller companies in the United States and
abroad
•Contract manufacturing is the best alternative for costly any
long-term investments
•Contract manufacturing arrangements enables large
companies to limit their wholly owned production units to
their core production lines
 Exporting
Contract Manufacturing
•Independent bottling companies perform contract filling
operations for Coca-Cola, while Pepsi perform similar services
for smaller and sometimes competitive companies
•Companies enter into contract manufacturing when they are
unable to produce products reasonably close to their markets, or
when they are own costs are higher than having the goods made
by someone else
 Exporting
Turnkey Systems
•Efficient Market Entry: Turnkey systems provide a swift entry into foreign
markets
•Risk Mitigation: Reduced exposure to regulatory and operational risks
•Time and Cost Savings: Faster implementation and lower setup costs
•Limited Control: Less control over the process and customization.
•Dependency: Reliance on third-party providers for critical components.
•Adaptation Challenges: May not align perfectly with unique international
market dynamics.
 Exporting
Turnkey Systems
•Example 1: A multinational corporation using a turnkey logistics
solution to establish a distribution network in a new country.
•Example 2: An export-oriented manufacturer adopting a turnkey
manufacturing system to set up a production facility abroad.
•Example 3: A shipping company implementing a turnkey cargo
tracking system for efficient global logistics management.
 Exporting
Licensing
•Licensing involves granting permission to a foreign entity to use certain
intellectual property rights, technology, or processes.
Advantages of Licensing
•Market Access: Enables entry into new markets with the help of local partners.
•Revenue Generation: Generates revenue through licensing fees and royalties.
•Risk Mitigation: Sharing risks and costs with the licensee.
•Global Branding: Extends the reach and brand recognition in international
markets.
 Exporting
Licensing
Disadvantages of licensing
•Loss of Control: Licensees may not uphold quality standards or
adhere to brand values.
•Limited Profit Potential: Royalties may limit potential profits.
•Intellectual Property Risk: Potential for unauthorized use or
replication.
•Competitive Threat: Licensees may become future competitors.
 Exporting
Franchising
•Franchising is similar to licensing, although it tends to involve much longer time
than licensing
•Licensing is primarily pursued by manufacturing firms while franchising is
employed by service firms, such as McDonald’s, KFC, and Hilton Hotels
•A franchising agreement involves a franchisor selling limited rights for the use of
its brand name to a manufacturer in return for a lump sum payment and a share
of the franchise’s profit
•In most franchising agreements, the franchise need to follow strict rules, for
instance, McDonald expect the franchise to run the McDonald franchise identical
to all other McDonald’s.
 Exporting
Franchising
Advantages
•Rapid Market Entry: Allows for quick market entry into foreign
countries through local franchisees.
•Risk Sharing: Franchisees bear the financial and operational
risks, reducing the burden on the franchisor.
•Brand Consistency: Ensures uniformity in branding,
product/service quality, and customer experience across global
locations.
•Local Expertise: Leverages the local knowledge and cultural
understanding of franchisees for successful market adaptation.
•Revenue Stream: Franchise fees and ongoing royalties
contribute to a steady revenue stream.
 Exporting
Franchising
Disadvantages
•Loss of Control: Limited control over franchisee operations
can lead to inconsistent quality.
•Sharing Profits: Franchisees share a portion of profits with the
franchisor.
•Cultural Challenges: Adapting to diverse cultures and
consumer behaviors may pose difficulties.
•Reputation Risk: Mismanagement or quality issues at
franchisee locations can harm the brand's reputation.
•Market Variability: Economic and market conditions may vary
significantly across countries.
 Exporting
Strategic Alliances
•Strategic alliances are collaborative agreements between
organizations to achieve vertical or horizontal integration, often
from different countries, to achieve common objectives in
international trade.
•Strategic alliance is different because of its informal nature,
Exchange of equity or debt are rarely involved, no formal
mergers or acquisitions are involved
•Risk Mitigation: Sharing financial and operational risks.
•Resource Optimization: Combining strengths in technology,
capital, and expertise
 Exporting
Strategic Alliances
Challenges
•Cultural Differences: Navigating diverse work cultures and
communication styles.
•Legal and Regulatory Hurdles: Adhering to international laws
and regulations.
•Strategic Alignment: Ensuring partners' goals align for mutual
benefit
 Exporting

Foreign Direct Investment

•Foreign direct (FDIs) investment’s are made by companies
into foreign markets for the purpose of owning or co-owning,
controlling, and managing a business enterprise with market
share and earnings objectives
•FDIs are made to achieve two objectives: vertical integration
and horizontal integration
•Vertical integration: establishes control over sources of
production or control over distribution, marketing, sales, and
after sale services
•Horizontal integration: is intended to achieve market control
through understandings or corporation agreements to allocate
and maintain market share
 Exporting

Foreign Direct Investment

•Horizontal integration is commonly done by beverage
companies, restaurant chains, and the entertainment industry.
Horizontal integration is done to achieve goals and objective
which cannot be achieved alone
•FDI’s themselves fall into two major categories: joint venture,
and wholly owned subsidiaries
 Exporting

Joint Ventures
•Establishing a joint venture with a foreign firm has long
been a popular mood for entering new markets for two
reasons:
1.Many projects are capital and technology intensive projects require a
huge resources which are beyond the means or a huge risk for a single
entity
2.Many host nations encourage foreign investments to partner with
local business in an effort to guarantee partial ownership in full
participation
•Equity, earnings and decision making is equally divided
corporate partners
Exporting
Exporting
 Exporting

Wholly Owned Subsidiary

•A wholly owned subsidiary is a corporation whose equity is
almost or entirely owned by another corporation
•The investing company is called “parent” and the subsidiary is
called the “ sub”.
•A subsidiary company allows the parent company to have more
control over operations then any other modes we discussed
before, however, the requirements of local laws need to be
fulfilled in the decision making process between parent and
subsidiary
•Establishing a wholly owned subsidiary in a foreign market can
be done by either acquiring an established firm or setting up a
completely new operation
 Exporting

Wholly Owned Subsidiary

•There are two major advantages of using subsidiaries:
1.First, the wholly-owned subsidiary will reduce the risk of losing control of
core competencies of a particular company, especially, companies with
technology-intensive goods and services
2.Second, a wholly-owned subsidiary offers maximum global control over
operations to a company, if the parent company has become geocentric in
developing and implementing its strategies
•The major disadvantage of this type of entry mode is the costly
approach for achieving presence in foreign market, companies
must bear the full cost and risk of setting up and maintaining
operations abroad
 Exporting
Foreign portfolio investments
•Foreign portfolio investment (FPI) is an investment in
foreign-based securities (stocks and bonds). The
objective is to generate income through interest,
dividends, and capital gains.
•FPIs is the largest portion of international investment in
the world
•FPIs movements are more volatile than that of FDIs
•Decision of investment and disinvestment in FPIs can
be done instantly
•There are many advantages and disadvantages of
FPIs
 CONCLUSION AND SUMMERY
• Discuss the different types of options available for
international business to operate
• Focus was on manufacturing companies whose
major thrust is product production, sourcing, and
marketing
 KEY TERMS AND CONCEPTS
• Contract manufacturing
• Direct exporting to end-users
• Exporting
• Exporting through foreign import agents
• Exporting through foreign import distributors
• Export trading companies (ETCs)
• Foreign direct investments (FDIs)
• Foreign portfolio investments (FPIs)
• Franchising
• Importing
• Licensing
• Strategic alliance
• Turnkey system
 DISCUSSION QUESTIONS

1. Describe and explain the similarities

and differences between strategic
alliances in joint venture agreements

1. Explain exactly how a foreign company

can set up and manage a contract
manufacturing in China