Modes of Entry into International Business

Modes of Entry into International Business

There are several ways and modes of international business, which could be adopted by companies that want to enter the international business. Some of the important modes of entry into international business generally followed in international business are discussed as follows:

International business refers to any business activity that involves cross-border transactions, whether it includes investing in foreign markets, importing or exporting goods, or establishing a presence in a foreign country. This can include everything from multinational companies to small businesses that sell products or services across borders.

International business is a very comprehensive, complex and multifaceted term, which includes many activities that are pursued by different organisations to capture a share of the foreign market, but which often goes unnoticed as an individual is unable to make out that they form a part of international business. There are several ways normally called modes of international business, which could be adopted by companies that want to enter the international business.

Some of the important modes of entry into international business are given as follows:

  • Direct and Indirect Exporting
  • Licensing
  • Franchising
  • Contract Manufacturing
  • Turnkey Projects
  • Joint Ventures
  • Mergers & Acquisitions
  • Strategic Alliance

1) Direct and Indirect Exporting

It is one of the basic modes of entry into international business. Exports are goods and services which are produced in one country and marketed in another country. In direct export, a company takes full responsibility for making its goods available in the target market by selling directly to the end consumers.

Indirect export takes place when the exporting company sells its products to middlemen, who in turn then resell the same products to the end consumers in the target market.

2) Licensing

Licensing is also known as technical cooperation, it is an easy way for a manufacturer to be involved in international marketing with a limited degree of risk. Licensing occurs when a company within the foreign market, the licensee, agrees with a licensor who offers the right to use a manufacturing process, trade secret of value for a fee or royalty, patent rights, or trademark rights of the company.

The licensee will produce the licensor’s products and market these products in his assigned region. After that, the licensee will pay the royalties to the licensor related to the sales volume of the products.

The producing company hereby escapes expensive tolls and other exchange fluctuations, trade barriers, high transportation costs and political risks. Licensing has an intuitive appeal to many prospective global players.

As a mode of globalization, licensing requires neither capital investment nor detailed involvement or close contact with customers worldwide. It is an arrangement by which a firm transfers its intangible property such as expertise, know-how, blueprints, technology, and manufacturing design to its unit, or a firm, located abroad.

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3) Franchising

Franchising involves the granting of the right by a parent company (the franchiser) to another (the franchisee) to do business in a prescribed manner. It may take different forms. In direct franchising, the franchiser frames policy, and monitors and directs the activities in each host country from its home-country base. But in the case of indirect franchising, there are sub-franchisers between the original franchiser and the host country units.

4) Contract Manufacturing

Contract manufacturing is a process that establishes a working agreement between two different companies. One company custom produces parts or other materials on behalf of their client As a result, the client does not have to maintain manufacturing facilities, purchase raw materials, or hire labour to produce the finished goods. 

A company that markets and sells products on the global market might arrange for a local manufacturer to produce the product for them under contract. Examples include Gap and Nike, both of whom use contract clothing and shoe manufacturers in lower labour-cost nations.

The advantage of arranging contract manufacture is that it allows the firm to concentrate on its sales and marketing activities and, because investment is kept to a minimum, it makes withdrawal somewhat easy and less costly if the product proves to be unsuccessful.

5) Turnkey Projects

In this method, the company contracts with a foreign entity to design and build an entire operation. On completion of the project, the operation is handed over to the owner who can use the facilities straight away. In a turnkey project agreement, a company agrees to construct a complete plant in a foreign country and make it completely operational. It is known as turnkey because the licensor starts the operation and hands over the key to the operating plant to the licensee.

6) Joint Ventures

A joint venture is a shared ownership in a foreign company. It is generally a 50-50 ownership between two parties. Joint ventures occur when a company decides that shared ownership of a specially set up new company for marketing and manufacturing is the most appropriate method of exploiting a business opportunity.

It is usually based on the assumption that two or more companies can contribute complementary expertise or resources to the joint company, which, as a result, will have a unique competitive advantage to exploit.

7) Mergers & Acquisitions

M&As take two forms. One is the acquisition where one company acquires or purchases another company. The former is known as Acquiring Company and the latter is known as the target company. No new company comes into existence after the merger.

The other form manifests in consolidation or amalgamation where two merging companies lose their identity into a new firm that comes to exist representing the interest of the two.

For example, in the 1999 merger of Glaxo Wellcome and Smith Kline Beecham, both companies ceased to exist when they merged, and a new company, Glaxo Smith Kline, was formed.

8) Strategic Alliance

A strategic alliance is a relationship between two or more parties to pursue a set of agreed-upon goals or to meet important business needs while remaining independent organisations. Strategic alliances have developed in importance over the last few decades as a competitive strategy in global marketing management.

SIAS is sought as a method to shore up weaknesses and increase competitive strengths. Opportunities for rapid growth into new markets, access to new technology, more efficient production and marketing costs, strategic competitive moves and access to additional sources of capital are motives for engaging in strategic international alliances.

Relation of International Business

International Relations is the study of the relations between nations and other political economic units in the international system. Particular areas of study within the field of international relations include diplomacy and diplomatic history, international law, international organisations, international finance and economics, and communication among others.

In addition, in recent years increased attention has been given to developing a more scientific understanding of the international system as a whole.

International Relations (IR) occasionally referred to as International Studies (IS) is the study of relationships between countries, including the roles of states, Inter-Governmental Organisations (IGOS), International Non-Governmental Organisations (INGOs), Non-Governmental Organisations (NGOs), and Multinational Corporations (MNCs).

According to Hoffman, “The discipline of IR is concerned with the factors and activities which affect the external policies and the power of the basic units into which the world is divided”. 

According to Palmer and Perkins, “IR encompasses much more than the relations among nation-states and international organisations and groups. It includes a great variety of transitional relationships, at various levels, above and below the level of the nation-state, still the main actor in the international community”,

It can be referred to as the discipline that studies interactions between countries and among states, and more broadly the workings of the international system as a whole. It can be conceived of either as a multidisciplinary field, gathering the international aspects of politics, economics, history, law, and sociology, or as a multidiscipline, focusing on the systemic patterns and structures of the interaction of the human species taken as a whole.

Significance of Relation of International Business

International relations are an extremely important aspect of citizenship in a global society. As our world becomes smaller and smaller through communication technology, rapid air transportation and a complex global economy, the value of peaceful and cooperative relationships between nations is increasingly important because of the following:

  1. Peace
  2. Economy
  3. Immigration
  4. Global Concerns
  5. Culture

1) Peace

Historically, one of the oldest expressions of international relations was the establishment of agreements and treaties between different countries. Maintenance of these treaties ensured that common people could go about their everyday tasks of earning a living and raising their families rather than devoting themselves to armed conflict with neighbours. This procedure of international relations remains just as relevant today.

2) Economy

Positive international relations also promote effective trade policies between countries, both in terms of importing natural resources and finished products not available in one country and in terms of gaining access to the bigger market afforded by exports to foreign lands. International relations define the necessities and limitations of cross-border trade. 

3) Immigration

Besides the transport of goods over international borders, people also often migrate between countries, looking for opportunities to improve their lives. This travel may be permanent or temporary, but in either case, it must be regulated to ensure the rule of law-criminals must be kept out of the country while legitimate business, tourist and immigrant travel is preserved. International relations play a key role in determining border control policies. 

4) Global Concerns

Nations usually face global issues that are bigger than any specific country or even continent, such as concerns over the environment, pandemics or terrorism. Sound international relations are required for countries to cooperate effectively to meet these challenges, allowing them to share relevant information quickly and pool resources.

5) Culture

International relations are not only about regulating and controlling the flow of goods and information; they are also useful for promoting the advancement of human culture broadly. The diversity of global cultures can be boosted and shared through enlightened international relations policies, allowing programs such as student exchanges and cultural exhibitions to improve understanding of the variety of human expression worldwide.

Modes of Entry into International Business

Related Questions:-

  1. What are the 5 modes of entry into the international market?
  2. What is the joint venture mode of entry into international business?
  3. What is the meaning of mode of entry in international marketing?
  4. What is the franchising entry mode?
  5. What is the mode of entry for international business in India?
  6. What is the investment entry mode?
  7. What is the difference between franchising and joint venture modes of international market entry?

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Modes of Entry into International Business