International Business: Exporting

• Different modes of entry into international business can include exporting, licensing, franchising, contract manufacturing, management contracts, FDI without alliances, and FDI with alliances.

Forms of Exporting

• Exporting involves shipping goods and services out of a country's port, where the seller is the "exporter" and the buyer is the "importer."
• Indirect exporting means the firm participates in international business through an intermediary, without direct dealings with foreign customers or markets.
• Direct exporting means the firm interacts directly with foreign customers or markets, allowing for relationship development.
• Intra-corporate transfers involves a company from USA that transfers to another company in India.

Indirect Exporting

• Indirect exporting includes exporting goods and services through various home-based exporters like manufacturers' export agents, export commission agents, export merchants and international firms.

Direct Exporting

• Direct exporting is where a company in the USA deals directly with a company in India.

Exporting Advantages

• Relatively low financial exposure.
• Allows gradual market entry and acquiring knowledge about the local market.
• Helps avoid restrictions on foreign investment.

Exporting Disadvantages

• Vulnerability to tariffs and non-tariff barriers (NTBs).
• Logistical complexities.
• Potential conflicts with distributors.

Licensing

• Licensing occurs when a firm (licensor) leases the right to use its intellectual property (technology, work methods, patents, copyrights, brand names, or trademarks) to another firm (licensee) in return for a fee.
• Property licensed could include patents, trademarks, copyrights, technology, technical know-how, and specific business skills.

The Licensing Process

• The licensor leases the rights to use intellectual property.
• The licensee uses the intellectual property to create products.
• The licensor earns new revenues with low investment.
• The licensee pays a royalty to the licensor.

International Licensing Issues

• Specifying the boundaries, determining compensation, establishing rights, privileges, and constraints.
• Specifying the contract duration.
• Navigating differences in laws and culture.

Licensing Advantages

• Low financial risks and costs.
• Allows low-cost market potential assessment.
• Avoids tariffs, NTBs, and restrictions on foreign investment.
• Licensee provides knowledge of local markets.

Licensing Disadvantages

• Limited market opportunities/profits.
• Dependence on the licensee.
• Potential conflicts with the licensee.
• Possibility of creating a future competitor.

Franchising

• Franchising is an agreement where an independent organization (franchisee) operates under the name of another company (franchisor).
• The franchisee pays a fee to the franchisor.
• Franchising allows the Franchisor to exercise more control over the Franchisee as compared to that in Licensing.

Franchising Agreements

• Franchisee pays a fixed amount and royalty based on sales.
• Franchisee agrees to adhere to the franchisor's requirements.
• Franchisor helps the franchisee in establishing manufacturing facilities.
• Franchisor allows some degree of flexibility.

Franchising Advantages

• Low financial risks and costs.
• Low-cost way to assess market potential.
• Avoids tariffs, NTBs, and restrictions on foreign investment.
• Maintains more control than with licensing.
• Franchisee provides knowledge of the local market.

Franchising Disadvantages

• Limited market opportunities/profits.
• Dependence on the franchisee.
• Potential conflicts with the franchisee.
• Possibility of creating a future competitor.

FDI without Alliances

• Companies can enter international markets through FDI by investing their money and establishing manufacturing and marketing facilities through ownership and control.
• Greenfield strategy involves starting a company's operations from scratch in a foreign market.

FDI with Strategic Alliances

• Strategic alliances involve a cooperative and collaborative approach to achieve larger goals.
• Many complex issues are solved through alliances, leveraging each other's strengths.
• Alliances aid in developing new products with the interaction of multiple industries and help meet the challenges of technological revolution.
• They can help in managing heavy financing and become strong to compete with multinational companies.

Modes of FDI through Alliances

• Merger involves combining two or more companies, often offering stockholders of one company securities in the acquiring company in exchange for their stock.
• Acquisition occurs when one company takes over another and establishes itself as the new owner, resulting in a purchase called an acquisition.
• Joint ventures involve an entity formed between two or more parties to undertake economic activity together, creating a new entity by contributing equity and sharing revenues, expenses, and control.

Acquisition Advantages

• Obtains control over the acquired firm, including factories and brand names.
• Integrates the management of the firm into its overall international strategy.

Acquisition Disadvantages

• Assumes all the liabilities, including financial and managerial.

Joint Ventures Advantages

• Benefit from local partner's knowledge.
• Shared costs/risks with partner.
• Reduced political risk.

Joint Ventures Disadvantages

• Risk giving control of technology to partner.
• May not realize experience curve or location economies.
• Shared ownership can lead to conflict.