International Entry Modes and Barriers

INTERNATIONAL ENTRY MODES AND BARRIERS

International Business

International business may be defined simply as business transactions that take place across national borders. This broad definition includes the very small firm that exports (or imports) a small quantity to only one country, as well as the very large global firm with integrated operations and strategic alliances around the world.

International business is a term used to collectively describe all commercial transactions (private and governmental, sales, investments, logistics, and transportation) that take place between two or more nations.

Usually, private companies undertake such transactions for profit; governments undertake them for profit and for political reasons.

It refers to all those business activities which involves cross border transactions of goods, services, resources between two or more nations.

Transaction of economic resources include capital, skills, people etc. for international production of physical goods and services such as finance, banking, insurance, construction etc.

Multinational Companies

A multinational enterprise (MNE) is a company that has a worldwide approach to markets and production or one with operations in more than a country. An MNE is often called multinational corporation (MNC) or transnational company (TNC).

Well known MNCs include fast food companies such as McDonald's and Yum Brands, vehicle manufacturers such as General Motors, Ford Motor Company and Toyota, consumer electronics companies like Samsung, LG and Sony, and energy companies such as ExxonMobil, Shell and BP. Most of the largest corporations operate in multiple national markets.

International business grew over the last half of the twentieth century partly because of liberalization of both trade and investment, and partly because doing business internationally had become easier.

In terms of liberalization, the General Agreement on Tariffs and Trade (GATT) negotiation rounds resulted in trade liberalization, and this was continued with the formation of the World Trade Organization (WTO) in 1995. At the same time, worldwide capital movements were liberalized by most governments, particularly with the advent of electronic funds transfers.

In terms of ease of doing business internationally, two major forces are important:

1. technological developments which make global communication and transportation relatively quick and convenient; and

2. the disappearance of a substantial part of the communist world, opening many of the world's economies to private business.

Entry into International Business

There are some basic decisions that the firm must take before foreign expansion like: -which markets to enter-when to enter those markets

These factors have been explained below:

Which foreign markets?1. The choice based on nation’s long run profit potential:

Before investing in another country, it is to be considered what returns it is likely to give. Long-run benefits of doing business in a country depends on following factors-

Size of market (in terms of demographics): means the volume of the population of the target country that may be interested in buying the

product/service. This study of the population is based on factors such as age, race, sex, economic status, level of education, income level and employment.

The present wealth of consumer markets (purchasing power): means the ability of the interested customer to buy the product/service, in terms of money.

Nature of competition: means the number of similar companies present in the target country.

By considering such factors firm can rank countries in terms of their attractiveness and long-run profit.

Example- selling Honda home robots eg. Nuvo and baby robots in the country like India, where there is no such population that intend to buy those robots and not such money to afford them, will be a complete failure.

2. Look in detail political factors which influence foreign markets:

Political factors refers to political decisions, conditions, events, or activities in a country that affect the business climate. These risks could cause investors to earn less money than anticipated.It is to be analysed what the target country’s government thinks about the invasion of foreign countries entering in their country’s market. Some of the governments are liberal while others are not.Some factors are:

Rues and regulations of the target country: what are the procedures of doing business in the target country

Charges to be paid: the amount that is to be paid as fees of entering in the target country is also be considered.

Type of political system: democratic, totalitarian or mixed economy.a. Democratic System (Market economy)

The general population has the right to vote and decide on the rules that govern them.

People can own property and run businesses. They are encouraged to be entrepreneurs.

Market-oriented or capitalist economy that usually promotes free trade.

b. Totalitarian Systems (Command economy/Centrally planned economy)

People have no democratic rights. Examples include North Korea and Cuba. Power is centralized and the military is used to enforce rules. Usually a single party rule or dictatorship. Most of these nations have a command economy which means the

government allocates resources. People cannot control their own business and are told what kind of work

they will do. Entrepreneurship is discouraged.

c. Mixed System (Mixed economy)

In practice, most countries have a mixed economy which has characteristics of both the market and command economies.Doing business with command economies or countries in transition between political systems can be risky.

Political independence: when a country makes decisions without considering how those decisions might impact other countries.

Political interdependence: when a country makes political decisions based on how it impacts them as well as other countries. Political influence from other countries shapes your own country’s political decisions.

Economic Imperialism: the exploitation of developing countries by more developed countries.

Example: India is much imperialized by USA in several of its decisions such as Indo-Nuclear Deal.

3. Consideration of economic factors the affect the international business:

It is to be taken into mind that under what conditions the target country’s economy is working, whether it is recession or boom period. Starting a trade with the country who is already facing the recession period due to less demand, would not be a good decision.

Example: at time of recession period in India none of the foreign markets wanted to invest in India due to lesser demand and ultimately less profits or may be losses.

When to enter the foreign markets?It is important to consider the timing of entry.

Entry is early when an international business enters a foreign market before other foreign firms. Example: Launched in 1992, Uncle Chipps was a pioneer in branded potato chips in India. The extremely popular brand has grown from strength to strength post acquisition with consumers feeling a very strong connection with it.

And late, when it enters after other international businesses.The advantage is when firms enter early in the foreign market commonly known as first-mover advantages. Example:

First mover advantages- It’s the ability to prevent rivals and capture demand by establishing a

strong brand name. Ability to build sales volume in that country so that they can drive them

out of market. Ability to create customer relationship.

Disadvantages-

Firm has to devote effort, time and expense to learning the rules of the country.

Risk is high for business failure(probability increases if business enters a national market after several other firms they can learn from other early firms mistakes)

Modes of Entry in International Business

1. Exporting

The term "export" is derived from the conceptual meaning as to ship the goods and services out of the port of a country. The seller of such goods and services is referred to as an "exporter" who is based in the country of export whereas the overseas based buyer is referred to as an "importer".

The definition of "export" is when you trade something out of the country. In economics, an export is any good or commodity, transported from one country to another country in a legitimate fashion, typically for use in trade.

In national accounts "exports" consist of transactions in goods and services (sales, barter, gifts or grants) from residents to non-residents. A general delimitation of exports in national accounts is given below:

An export of a good occurs when there is a change of ownership from a resident to a non-resident; this does not necessarily imply that the good in question physically crosses the frontier. However, in specific cases national accounts impute changes of ownership even though in legal terms no change of ownership takes place (e.g. cross border financial leasing, cross border deliveries between affiliates of the same enterprise, goods crossing the border

Entry modes

Exporting

Mergers Joint Venture

Licensing

Acquisitions

Franchising

Wholly owned Subsidiary

Trunkey project

for significant processing to order or repair). Also smuggled goods must be included in the export measurement.

Export of services consists of all services rendered by residents to non-residents. In national accounts any direct purchases by non-residents in the economic territory of a country are recorded as exports of services; therefore all expenditure by foreign tourists in the economic territory of a country is considered as part of the exports of services of that country. Also international flows of illegal services must be included.

National accountants often need to make adjustments to the basic trade data in order to comply with national accounts concepts; the concepts for basic trade statistics often differ in terms of definition and coverage from the requirements in the national accounts:

Data on international trade in goods are mostly obtained through declarations to custom services. If a country applies the general trade system, all goods entering or leaving the country are recorded. If the special trade system (e.g. extra-EU trade statistics) is applied goods which are received into customs warehouses are not recorded in external trade statistics unless they subsequently go into free circulation in the country of receipt.

A special case is the intra-EU trade statistics. Since goods move freely between the member states of the EU without customs controls, statistics on trade in goods between the member states must be obtained through surveys. To reduce the statistical burden on the respondents small scale traders are excluded from the reporting obligation.

Statistical recording of trade in services is based on declarations by banks to their central banks or by surveys of the main operators. In a globalized economy where services can be rendered via electronic means (e.g. internet) the related international flows of services are difficult to identify.

Basic statistics on international trade normally do not record smuggled goods or international flows of illegal services. A small fraction of the smuggled goods and illegal services may nevertheless be included in official trade statistics through dummy shipments or dummy declarations that serve to conceal the illegal nature of the activities.

Process

Methods of export include a product or good or information being mailed, hand-delivered, shipped by air, shipped by boat, uploaded to an internet site, or downloaded from an internet site. Exports also include the distribution of information that can be sent in the form of an email, an email attachment, a fax or can be shared during a telephone conversation.

In India, all exports and imports are governed by the EXIM policy.

India Exim Policy - Foreign Trade Policy.

Exim Policy or Foreign Trade Policy is a set of guidelines and instructions established by the DGFT in matters related to the import and export of goods in India.

The Foreign Trade Policy of India is guided by the Export Import in known as in short EXIM Policy of the Indian Government and is regulated by the Foreign Trade Development and Regulation Act, 1992.

DGFT (Directorate General of Foreign Trade) is the main governing body in matters related to Exim Policy. The main objective of the Foreign Trade (Development and Regulation) Act is to provide the development and regulation of foreign trade by facilitating imports into, and augmenting exports from India. Foreign Trade Act has replaced the earlier law known as the imports and Exports (Control) Act 1947.

INDIRECT EXPORTING: exporting to destination through an intermediary. Eg. India expots sugar to Pakistan through Singapore and Dubai

DIRECT EXPORTING: is selling the products in a foreign country directly through its distribution arrangement or through a host country’s company.

INTRACORPORATE TRANSFER: are selling of products by a company to its affiliation company in host country (or another country). Eg. HLL in India to UNILEVER in USA

How to start export business

1. Identifying Products For Export2. Market Selection

3. SWOT Analysis

4. Registration of Exporters with RBI, DGFT, Export Promotion Council, Income Tax Authorities and commodity boards

5. Export License

6. Export Pricing And Costing

7. Understanding Foreign Exchange Rates

8. Export Risks Management

9. Packaging And Labeling Of Goods

10.Inspection Certificates And Quality Control

11.Custom Procedure For Export

Advantages Of Exporting: 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 wouldbe necessary under other modes.

Less Risks;Exporting involves less risk as the company understand the culture ,

customer and the market of the host country gradually. Later afterunderstanding the host country the company can enter on a full scale.

Motivation for exporting:Motivation for exporting are proactive and reactive. Proactivemotivations are opportunities available in the host country. Reactivemotivators are those efforts taken by the company to export theproduct to a foreign country due to the decline in demand for itsproduct in the home country.

Disadvantages

Difficulty in identifying customer needs

Potential problems with local distributors

Logistical considerations(costs of warehousing, transport, distribution, longer supply lines, difficulties in communication)

2. Mergers and Acquisitions

A general term used to refer to the consolidation of companies. A merger is a combination of two companies to form a new company, while an acquisition is the purchase of one company by another in which no new company is formed.

Distinction between Mergers and Acquisitions Although they are often uttered in the same breath and used as though they were synonymous, the terms merger and acquisition mean slightly different things.

When one company takes over another and clearly established itself as the new owner, the purchase is called an acquisition. From a legal

point of view, the target company ceases to exist, the buyer "swallows" the business and the buyer's stock continues to be traded. Example: Dabur India announced its first overseas acquisition on 27th July, 2010, buying Hobi Kozmetik Group, a leading personal care products company in Turkey, with a view to consolidate their presence in the Middle East and North Africa region.

In the pure sense of the term, a merger happens when two firms, often of about the same size, agree to go forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a "merger of equals." Both companies' stocks are surrendered and new company stock is issued in its place. Example: Automobile company Mahindra & Mahindra bought Kinetic Co. in 2009.

Varieties of Mergers

From the perspective of business structures, there is a whole host of different mergers. Here are a few types, distinguished by the relationship between the two companies that are merging:

Horizontal merger - Two companies that are in direct competition and share the same product lines and markets. Example: The formation of Brook Bond Lipton India Ltd. through the merger of Lipton India and Brook Bond.

Vertical merger - A customer and company or a supplier and company. Think of a cone supplier merging with an ice cream maker.

Market-extension merger - Two companies that sell the same products in different markets.

Product-extension merger - Two companies selling different but related products in the same market.

Conglomeration - Two companies that have no common business areas.

There are two types of mergers that are distinguished by how the merger is financed. Each has certain implications for the companies involved and for investors:

o Purchase Mergers - As the name suggests, this kind of merger occurs when one company purchases another. The purchase is made with cash or through the issue of some kind of debt instrument; the sale is taxable.

Acquiring companies often prefer this type of merger because it can provide them with a tax benefit. Acquired assets can be written-up to the actual purchase price, and the difference between the book value and the purchase price of the assets can depreciate annually, reducing taxes payable by the acquiring company. We will discuss this further in part four of this tutorial.

o Consolidation Mergers - With this merger, a brand new company is formed and both companies are bought and combined under the new entity. The tax terms are the same as those of a purchase merger.

Acquisitions Like mergers, acquisitions are actions through which companies seek economies of scale, efficiencies and enhanced market visibility.

Unlike all mergers, all acquisitions involve one firm purchasing another - there is no exchange of stock or consolidation as a new company.

Acquisitions are often congenial, and all parties feel satisfied with the deal. Other times, acquisitions are more hostile.

In an acquisition, as in some of the merger deals we discuss above, a company can buy another company with cash, stock or a combination of the two. Another possibility, which is common in smaller deals, is for one company to acquire all the assets of another company.

Example: Company X buys all of Company Y's assets for cash, which means that Company Y will have only cash (and debt, if they had debt before). Of course, Company Y becomes merely a shell and will eventually liquidate or enter another area of business.

Another type of acquisition is a reverse merger, a deal that enables a private company to get publicly-listed in a relatively short time period. A

reverse merger occurs when a private company that has strong prospects and is eager to raise financing buys a publicly-listed shell company, usually one with no business and limited assets. The private company reverse merges into the public company, and together they become an entirely new public corporation with tradable shares.

Regardless of their category or structure, all mergers and acquisitions have one common goal: they are all meant to create synergy that makes the value of the combined companies greater than the sum of the two parts. The success of a merger or acquisition depends on whether this synergy is achieved.

Advantages: The company immediately gets the ownership and control over the

acquired firm’s factories, employee, technology, brand name anddistribution networks.

The company can formulate international strategy and generate morerevenues.

If the industry already reached the stage of optimum capacity level orovercapacity level in the host country. This strategy helps the hostcountry.

Disadvantages: Acquiring a firm in a foreign country is a complex task involving

bankers, lawyer’s regulation, mergers and acquisition specialists fromthe two countries.

This strategy adds no capacity to the industry. Sometimes host countries imposed restrictions on acquisition of local

companies by the foreign companies. Labor problem of the host country’s companies are also transferred to

the acquired company.

3. LicensingIn this mode of entry, the domestic manufacturer leases the right to useits intellectual property i.e. technology, copy rights, brand name etc toa 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 andenjoy the advantages without incurring any obligations and responsibilitiesof ownership, managerial, investment etc.

Because little investment on the part of the licensor is required, licensing has the potential to provide a very large ROI. However, because the licensee produces and markets the product, potential returns from manufacturing and marketing activities may be lost.

Cross-licensing Agreement

A firm might license some valuable intangible property to a foreign partner, but in addition to a royalty payment, the firm might also request that the foreign partner license some of its valuable know-how to the firm.

Eg. NSE has enabled Indian investors to access US Capital market and vice-versa through a cross-licensing agreement, on 10 March, 2010

Advantages;:- Low investment on the part of licensor. Low financial risk to the licensor Licensor can investigate the foreign market without much efforts on

his part. Licensee gets the benefits with less investment on research and

development Licensee escapes himself from the risk of product failure.

Disadvantages:

It reduces market opportunities for both the parties have to maintain the product quality and promote the product. Therefore one party can affect the other through their improper acts.

Chance for misunderstanding between the parties. Chance for leakages of the trade secrets of the licensor.

Licensee may develop his reputation

Licensee may sell the product outside the agreed territory and after theexpiry of the contract.

Example: Eg. Philips has entered into a brand licensing agreement with Videocon under which it will assume the responsibility of selling and after sale services of Philips consumer television set in India, for 5 yrs.

4. FranchisingUnder franchising an independent organization called the franchiseeoperates the business under the name of another company called thefranchisor.Under this agreement the franchisee pays a fee to the franchisor.

The franchisor provides the following services to the franchisee:1. Trade marks2. Operating System3. Product reputation4. Continuous support system like advertising , employee training ,reservation services quality assurances program etc.

Advantages: Low investment and low risk.

Franchisor can get the information regarding the market culture, customs and environment of the host country.

Franchisor learns more from the experience of the franchisees.

Franchisee get the benefits of R& D with low cost.

Franchisee escapes from the risk of product failure.

Disadvantages: It may be more complicating than domestic franchising.

It is difficult to control the international franchisee.

It reduce the market opportunities for both

Both the parties have the responsibilities to maintain product quality and product promotion.

There is a problem of leakage of trade secrets.

Eg. Italian designer goods maker Gucci entered the Indian retail market through its Indian franchisee Luxury Goods Retail.

5. Joint VentureTwo or more firm join together to create a new business entity that islegally 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.

Advantages: Joint venture provides large capital funds suitable for major projects. It spread the risk between or among partners. It provides skills like technical skills, technology, human skills, expertise, and

marketing skills.

It makes large projects and turn key projects feasible and possible.

Its synergy due to combined efforts of varied parties.

Disadvantages: Conflict may arise. Partner delay the decision making once the dispute arises. Then the

operations become unresponsive and inefficient. Life cycle of a joint venture is hindered by many causes of collapse. Scope for collapse of a joint venture is more due to entry of competitors. The decision making is slowed down in joint ventures due to the

involvement of a number of parties.

Eg. Bharti Airtel-Singapore Telecom

6. Trunkey ProjectsA turnkey project is a contract under which a firm agrees to fullydesign, construct and equip a manufacturing/ business/services facilityand turn the project over to the purchase when it is ready for operation for 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.

Example: nuclear power plants, airports, oil refinery, national highways, railway line etc. Hence they are multiyear project.

7. Wholly Owned SubsidiarySubsidiary means individual body under parent body. This Subsidiary orindividual body as per its own generates revenue. They give their ownrent, salary to employees, etc. But policies and trademark will beimplemented from the Parent body.

There are no branches here. Only the certain percentage of the profit will be given to the parent body.

A subsidiary, in business matters, is an entity that is controlled by a bigger and more powerful entity.

The controlled entity is called a company, corporation, or limited liability company, and the controlling entity is called its parent (or the parent company).

The reason for this distinction is that alone company cannot be a subsidiary of any organization; only an entity representing a legal fiction as a separate entity can be a subsidiary.

While individuals have the capacity to act on their own initiative, a business entity can only act through its directors, officers and employees.

The most common way that control of a subsidiary is achieved is throughthe ownership of shares in the subsidiary by the parent. These shares givethe parent the necessary votes to determine the composition of the board ofthe subsidiary and so exercise control. This gives rise to the common presumption that 50% plus one share is enough to create a subsidiary.

There are, however, other ways that control can come about and the exact rules both as to what control is needed and how it is achieved can be complex.

A subsidiary may itself have subsidiaries, and these, in turn, mayhave subsidiaries of their own. A parent and all its subsidiaries together arecalled a group, although this term can also apply to cooperating companiesand their subsidiaries with varying degrees of shared ownership.Subsidiaries are separate, distinct, legal entities for the purposes of taxationand regulation. For this reason, they differ from divisions, which arebusinesses fully integrated within the main company, and not legally orotherwise distinct from it.

Subsidiaries are a common feature of business life and most if not all major businesses organize their operations in this way.

Examples: holding companies such as Berkshire Hathaway, Time Warner, or Citigroup as well as more focused companies such also BM, or Xerox Corporation. These, and others, organize their businesses into national or functional subsidiaries, sometimes with multiple levels of subsidiaries.

8. Foreign Direct InvestmentForeign direct investment (FDI) is the direct ownership of facilities in the target country. It involves the transfer of resources including capital, technology, and personnel. Direct foreign investment may be made through the acquisition of an existing entity or the establishment of a new enterprise.

Direct ownership provides a high degree of control in the operations and the ability to better know the consumers and competitive environment. However, it requires a high level of resources and a high degree of commitment.

International Business Barriers

Three Barriers To International Trade

When we talk about international trade we mean the exchange of goods and/or services. This exchange usually takes place between two parties from different countries or between two countries located anywhere on the globe.

If the international trade takes place between two parties, it is known as bilateral trade and if the trade takes place between more than two parties, it is known as multi-lateral trade.

There are basically three barriers to international trade that are used by countries, and they are as follows:

1. Non-tariff Barrier

Usually this type of barrier is imposed by a country on imports so that

the quantity of imported items is restricted. Due to this, the availability of the imported item or items is restricted in the domestic market and the price too is very high.

Example: Quota System, Domestic Content Requirements, Import Licenses

2. Tariff Barrier

This is barrier is in the form of duties, taxes, quotas etc. Because of this barrier, imports decrease and price of imported products increase which results in the fall in the demand giving boost to domestic products.

Classification Of Tariff Barriers

1. On Basis of origin & destination of goods

Export Duty: Tax that is paid on goods leaving a country

Import Duty: Tax that is paid on goods coming in a country

Transit Duty: Tax that is paid on goods crossing the national borders of a country

2. Basis of quantification of tariff

Specific Duty: tariff of a specific amount of money that does not vary with the price of the good. These tariffs are vulnerable to changes in the market or inflation unless updated periodically.

Ad-Valorem: a set percentage of the value of the good that is being imported. Sometimes these are problematic, as when the international price of a good falls, so does the tariff, and domestic industries become more vulnerable to competition. Conversely, when the price of a good rises on the international market so does the tariff, but a country is often less interested in protection when the price is

high.

Compound duty: combination of specific duty and ad- valorem.

3. Basis of the purpose they serve

Revenue tariff: a set of rates designed primarily to raise money for the government. A tariff on coffee imports imposed by countries where coffee cannot be grown, for example raises a steady flow of revenue.

Protective tariff: intended to artificially inflate prices of imports and protect domestic industries from foreign competition especially from competitors whose host nations allow them to operate under conditions that are illegal in the protected nation, or who subsidize their exports.

Anti-dumping duty: tariff to increase the price of the imports to their original price so as to avoid dumping.

Countervailing duty: additional duty imposed to offset the effect of concessions and subsidies given to the exporting country from its government.

4. Voluntary Constraint

This is a type of international trade barrier wherein a country voluntarily restricts or stops imports from coming in. This is usually used to limit the competition that domestic industries will face with the coming in of imported goods.

Whenever a country starts international trade with another country, these three barriers to international trade are always taken into account. It has been seen that lower developed countries and developing countries tend to favor these three barriers to international trade as the countries can earn foreign exchange by introducing tariff and non-tariff barrier, the local industries are protected from competition by foreign companies and industries and as less imported goods are available in the country, consumers tend to buy local products giving the local industries a boost.

Bibliography:

www.wikipedia.com

www.quickmba.com

www.investopedia.com

www.infodrive.com

ISHMEET KAUR

MBA-3rd Sem

BPIBS

01611403909