288 33 powerpoint-slides_chapter-11-modes-international-business-expansion

Copyright @ Oxford University Press Copyright @ Oxford University Press International Business R. M. JoshiInternational Business R. M. Joshi

Chapter 11: Modes of International Chapter 11: Modes of International Business ExpansionBusiness Expansion

International BusinessInternational Business

Rakesh Mohan Joshi Rakesh Mohan Joshi

Professor & Chairperson, IIFT New DelhiProfessor & Chairperson, IIFT New Delhi

1



MODES OF MODES OF

INTERNATIONAL INTERNATIONAL

BUSINESS EXPANSIONBUSINESS EXPANSION

Chapter 11



Learning ObjectivesLearning Objectives

To explain the concept of expansion modes for To explain the concept of expansion modes for international businessinternational business

To examine strategic trade-offs in selecting To examine strategic trade-offs in selecting expansion modesexpansion modes

To discuss trade-related expansion modesTo discuss trade-related expansion modes To evaluate contractual expansion modesTo evaluate contractual expansion modes To elucidate investment modes of expansionTo elucidate investment modes of expansion To explicate strategy for selecting the expansion To explicate strategy for selecting the expansion

modesmodes To elaborate the decision making process for To elaborate the decision making process for

selecting the expansion modesselecting the expansion modes



Modes of International Business Modes of International Business ExpansionExpansion

These are specific forms of entering a foreign These are specific forms of entering a foreign

country so as to have international presence and country so as to have international presence and

achieve firm’s strategic goals. achieve firm’s strategic goals.

Mode of international business expansion is an Mode of international business expansion is an

institutional mechanism by which a firm expands institutional mechanism by which a firm expands

its operations overseas. its operations overseas.

Modes of expansion have also been referred to as Modes of expansion have also been referred to as

entry modesentry modes in the international business in the international business

literature. literature.



Factors Affecting Strategic Trade-offs in Factors Affecting Strategic Trade-offs in Selecting an Expansion ModeSelecting an Expansion Mode

Ability and willingness to commit resources in the Ability and willingness to commit resources in the target country target country

Magnitude of risk the firm is willing to take in its Magnitude of risk the firm is willing to take in its international expansioninternational expansion

Types of return anticipated from overseas Types of return anticipated from overseas operationsoperations

Extent of control to be exerted in firm’s foreign Extent of control to be exerted in firm’s foreign operationsoperations

Level of externalisation of firm’s resources Level of externalisation of firm’s resources including its intellectual propertyincluding its intellectual property

Desired flexibility of expansion modesDesired flexibility of expansion modes



Trade Related ModesTrade Related Modes

Expansion modes that employ some form of Expansion modes that employ some form of

trade to expand business in foreign trade to expand business in foreign

countries.countries.

Trade related modes are low- risk expansion Trade related modes are low- risk expansion

modes, highly suitable for simultaneous modes, highly suitable for simultaneous

expansion in geographically diverse expansion in geographically diverse

countries. countries.



ExportsExports

Manufacturing the goods in the home Manufacturing the goods in the home

country or a third country and shipping them country or a third country and shipping them

for sales to a country other than the country for sales to a country other than the country

of production. of production.

Export is the most common initial mode of Export is the most common initial mode of

entry into foreign markets as it involves entry into foreign markets as it involves

much lower risks and is a low cost and much lower risks and is a low cost and

simple mode of entry.simple mode of entry.



Indirect ExportsIndirect Exports

Selling through an export intermediary Selling through an export intermediary based in its home country and does not based in its home country and does not take care of export activity. take care of export activity.

In indirect exports, the firm is not required In indirect exports, the firm is not required to deal with hassles of export operations, to deal with hassles of export operations, it need little international experience, and it need little international experience, and much less resource commitment.much less resource commitment.

Indirect exports may take place either Indirect exports may take place either through home based agents or through through home based agents or through merchant intermediaries.merchant intermediaries.



AgentsAgents

Agents do not take the title of the goods and Agents do not take the title of the goods and operate on behalf of principal firms, rather than operate on behalf of principal firms, rather than themselves on commission basisthemselves on commission basis. .

Types of Export AgentsTypes of Export Agents

Importer’s buying agentsImporter’s buying agents

Country-controlled buying agentsCountry-controlled buying agents

Buying officesBuying offices



Merchant IntermediariesMerchant Intermediaries

Exports intermediaries that buy and sell Exports intermediaries that buy and sell

goods for a profit and take title of the goods goods for a profit and take title of the goods

and assume risks thereof. and assume risks thereof.



Merchant ExportersMerchant Exporters

They collect produce from several They collect produce from several

manufacturers or producers, export directly manufacturers or producers, export directly

in their own name and work on profit in their own name and work on profit

margins. margins.



International Trading CompaniesInternational Trading Companies

Generally large companies that accumulate, Generally large companies that accumulate,

transport, and distribute goods in various transport, and distribute goods in various

markets. markets.

Trading companies have been operating for Trading companies have been operating for

centuries as pioneers of international trade. centuries as pioneers of international trade.



Trading/Export HousesTrading/Export Houses

Home-country based firms involved in Home-country based firms involved in

international trading activities that serve as international trading activities that serve as

merchant intermediary for exports. merchant intermediary for exports.

As a part of export development strategies, As a part of export development strategies,

most countries facilitate such most countries facilitate such

trading/exports houses. trading/exports houses.



Direct ExportsDirect Exports

Making domestically produced products Making domestically produced products

available in foreign markets without available in foreign markets without

employing any market intermediary in the employing any market intermediary in the

home county. It does not mean that the home county. It does not mean that the

goods are sold directly to foreign-based end goods are sold directly to foreign-based end

customers. customers.



Manufacturers’ Export Agents or Sales RepresentativesManufacturers’ Export Agents or Sales Representatives

The individual intermediaries who operate on a The individual intermediaries who operate on a

commission basis and travel frequently to overseas commission basis and travel frequently to overseas

markets and carry out business in the name of the markets and carry out business in the name of the

firm rather than in their own name. firm rather than in their own name.

These agents specialize in one or a few countries These agents specialize in one or a few countries

and offer their services to a number of and offer their services to a number of

manufacturers for non-competing products. manufacturers for non-competing products.



Overseas-based Buying AgentsOverseas-based Buying Agents

Foreign based agents that have exclusive Foreign based agents that have exclusive

contract arrangements to perform the contract arrangements to perform the

exporting firm’s business, generally paid on exporting firm’s business, generally paid on

the basis of a specific percentage of profit the basis of a specific percentage of profit

and the cost incurred. and the cost incurred.



Merchant importersMerchant importers

An overseas-based trader who imports An overseas-based trader who imports

products and further sells these to a products and further sells these to a

wholesaler or a retailer for a profit. wholesaler or a retailer for a profit.

Merchant importers take possession and Merchant importers take possession and

title of the goods, therefore assuming risks title of the goods, therefore assuming risks

and responsibilities thereof.. and responsibilities thereof..



DistributorsDistributors

The overseas distributors purchase the The overseas distributors purchase the

goods and subsequently sell them goods and subsequently sell them

either to a market intermediary or to either to a market intermediary or to

the ultimate customer. The distributors the ultimate customer. The distributors

have contractual agreements with the have contractual agreements with the

exporting manufacturers and deal with exporting manufacturers and deal with

them on a long-term basis. them on a long-term basis.



Piggybacking (Complementary Exports)Piggybacking (Complementary Exports)

Use of well-established distribution network Use of well-established distribution network

of another company in foreign country.of another company in foreign country.



Counter-TradeCounter-Trade

Various forms of trade arrangements Various forms of trade arrangements

wherein the payment is in form of wherein the payment is in form of

reciprocal commitments for other goods or reciprocal commitments for other goods or

services rather than an exclusive cash services rather than an exclusive cash

transaction. In addition, trade financing transaction. In addition, trade financing

and price-setting are tied together in a and price-setting are tied together in a

single transaction. single transaction.



Forms of Counter-TradeForms of Counter-Trade

Simple barter:Simple barter: Direct and simultaneous Direct and simultaneous exchange of goods without use of moneyexchange of goods without use of money. .

Clearing arrangement:Clearing arrangement: The transaction of The transaction of goods and services that extends an agreed period goods and services that extends an agreed period

of time.of time. Switch trading:Switch trading: Trading involving a third party, Trading involving a third party,

known as switch trader in the transaction to known as switch trader in the transaction to facilitate buying of unwanted goods from the facilitate buying of unwanted goods from the importer and make payment by cash or barter to importer and make payment by cash or barter to the exporter. the exporter.



Counter purchase:Counter purchase: A deal involving two A deal involving two separate transactions payable in hard currency, separate transactions payable in hard currency, each with its own cash value.each with its own cash value.

Buyback:Buyback: Often used as a marketing tool to sell Often used as a marketing tool to sell plant and equipment wherein the payment is plant and equipment wherein the payment is recovered by way of output from plant and recovered by way of output from plant and equipment sold. equipment sold.

Offset:Offset: Partial payment is made by the importer Partial payment is made by the importer in hard currency, besides promising to source in hard currency, besides promising to source inputs from the importing country and also make inputs from the importing country and also make investment to facilitate production of such goods. investment to facilitate production of such goods.



e-Modes of Business Expansione-Modes of Business Expansion

Use of information and communication Use of information and communication

technology for expanding business technology for expanding business

internationally. internationally.



Contractual Modes of Business Contractual Modes of Business ExpansionExpansion

Making use of strategic strengths and Making use of strategic strengths and resources of a foreign-based partner resources of a foreign-based partner company for international business company for international business expansion. expansion.

In contractual expansion modes, the partner In contractual expansion modes, the partner firms complement each other with one or firms complement each other with one or more of their strategic strengths, such as more of their strategic strengths, such as superior technology, strong brand equity, superior technology, strong brand equity, manufacturing facilities, well-established manufacturing facilities, well-established distribution network, etc. distribution network, etc.



International Strategic AllianceInternational Strategic Alliance

Cooperation with one or more than one firm Cooperation with one or more than one firm

overseas to carry out a business activity overseas to carry out a business activity

wherein each one contributes its different wherein each one contributes its different

capabilities and strengths to the alliance.capabilities and strengths to the alliance.



International Contract ManufacturingInternational Contract Manufacturing

A contractual arrangement under which a A contractual arrangement under which a

firm’s manufacturing operations are carried firm’s manufacturing operations are carried

out in foreign countries.out in foreign countries.



International Management ContractsInternational Management Contracts

Providing managerial and technical Providing managerial and technical

expertise to an overseas firm on contractual expertise to an overseas firm on contractual

basis. basis.



International Turnkey ProjectInternational Turnkey Project

Conceptualizing, designing, constructing, Conceptualizing, designing, constructing,

installing, and carrying out preliminary installing, and carrying out preliminary

testing of manufacturing facilities or testing of manufacturing facilities or

engineering projects at overseas locations engineering projects at overseas locations

for a client organization.for a client organization.



International LeasingInternational Leasing

Making available new and used equipment Making available new and used equipment

through a foreign-based firm for use, in through a foreign-based firm for use, in

return of a fee called leasing fee.return of a fee called leasing fee.



International LicensingInternational Licensing

Making available intangible assets to a Making available intangible assets to a

foreign company, such as patents, foreign company, such as patents,

trademarks and copyrights, technical know-trademarks and copyrights, technical know-

how and skills (technical guidance, how and skills (technical guidance,

feasibility and product studies, manuals) feasibility and product studies, manuals)

engineering, designs, etc., for a fee termed engineering, designs, etc., for a fee termed

as royalty.as royalty.



Major Types of Licensing ArrangementsMajor Types of Licensing Arrangements

Process licensingProcess licensing Trade-mark licensingTrade-mark licensing Cross-licensingCross-licensing



International FranchisingInternational Franchising

A special form of licensing in which A special form of licensing in which

intangible assets are transferred to a foreign intangible assets are transferred to a foreign

firm alongwith methods of doing business in firm alongwith methods of doing business in

a prescribed manner and other assistance a prescribed manner and other assistance

over an extended period of time in return for over an extended period of time in return for

a franchising fee.a franchising fee.



Investment Modes of Business Investment Modes of Business ExpansionExpansion

If a country is found attractive enough to If a country is found attractive enough to

justify a firm’s long-term commitment, justify a firm’s long-term commitment,

investment modes of expansion are often investment modes of expansion are often

adopted. adopted.



Overseas AssemblyOverseas Assembly

Exports of components, parts or machinery Exports of components, parts or machinery

in CKD condition and assembling these parts in CKD condition and assembling these parts

at a site in a foreign country. at a site in a foreign country.



International Joint VentureInternational Joint Venture

Equity participation of two or more firms Equity participation of two or more firms

resulting in formation of a new entity. resulting in formation of a new entity.



Wholly Owned SubsidiaryWholly Owned Subsidiary

Setting up a fully owned new entity in a Setting up a fully owned new entity in a

foreign country.foreign country.



Greenfield OperationsGreenfield Operations

Creating production and marketing facilities Creating production and marketing facilities

on a firm’s own from scratch.on a firm’s own from scratch.



Mergers and AcquisitionsMergers and Acquisitions

Transfer of existing assets of a domestic firm to Transfer of existing assets of a domestic firm to

a foreign firm lead to mergers and acquisitions.a foreign firm lead to mergers and acquisitions.

Cross-border mergersCross-border mergers: a new legal entity : a new legal entity

emerges by way of merging assets and emerges by way of merging assets and

operations of firms from more than one country. operations of firms from more than one country.

Cross-border acquisitionCross-border acquisition:: involves involves

transferring management control of assets and transferring management control of assets and

operations of a domestic company to a foreign operations of a domestic company to a foreign

firm. As a result the local firm becomes an firm. As a result the local firm becomes an

affiliate of the foreign company. affiliate of the foreign company.



Strategy for Selecting International Strategy for Selecting International Business Expansion ModeBusiness Expansion Mode

Naïve ruleNaïve rule

Pragmatic rulePragmatic rule

Strategy ruleStrategy rule



Marketing Strategy and Expansion Marketing Strategy and Expansion ModesModes

Market penetration strategyMarket penetration strategy: : When a When a

firm focuses itself on a select few countries.firm focuses itself on a select few countries.

Market-skimming strategy: Market-skimming strategy: When a firm When a firm

either simultaneously or in quick succession either simultaneously or in quick succession

enters a large number of countriesenters a large number of countries. .



Sequential Adoption of Business Sequential Adoption of Business Expansion ModesExpansion Modes

Platform countries: eg. Platform countries: eg. Singapore and Hong Singapore and Hong

KongKong Emerging countries: eg. Emerging countries: eg. Vietnam, Myanmar, Vietnam, Myanmar,

Laos, and CambodiaLaos, and Cambodia Growth countries: eg. Growth countries: eg. China, India, China, India,

Thailand, Indonesia, Malaysia, and Thailand, Indonesia, Malaysia, and

Philippines Philippines Maturing countries: eg. Maturing countries: eg. Korea and TaiwanKorea and Taiwan Established countries: eg. Established countries: eg. JapanJapan



Decision-Making Process for Selecting Decision-Making Process for Selecting Modes of International Business Modes of International Business

ExpansionExpansion

The expansion mode strategy should aim The expansion mode strategy should aim

at achieving a firm’s strategic goals. It at achieving a firm’s strategic goals. It

should aim at optimal harnessing of a should aim at optimal harnessing of a

firm’s core competencies by way of firm’s core competencies by way of

international expansion. international expansion.

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