Entry to international business with strategy
A company that wants to expand internationally, there are sewers ble entry options. They are listed as follows.
- Export strategy
- Foreign direct investment.
This method remains the most common means of entry into international business. Export strategy is a very attractive option that is merely an extension of domestic operations. It also minimises the risk component as well as the capital requirement The host company’s involvement in the international market is limited to identifying customers for marketing its products
A domestic company can license foreign firms to use the company’s technology or products and distribute the company’s product. By licensing the domestic company need not bear any costs and risks of entering foreign markets on its own, yet it is able to generate income from royalties.
The reverse of this arrangement is the risk of providing valuable technological knowledge to foreign companies, and thereby losing some degree of control over its use. Monitoring licenses and safeguarding company’s Intellectual Property Rights can prove to be challenging in an international scenario. Puma adopted licensing strategy post 1999.
Licensing works well for manufacturing companies but franchising is a better option for international expansion efforts of service or retailing companies. Franchising has the same advantages as licensing. The franchisee bears almost all the costs and risks in establishing the foreign operations. The franchiser’s contribution is limited to providing the concept, technology and training the franchisee in the already established model. Maintaining quality poses the biggest challenge to the franchiser. McDonalds uses franchising model.
Foreign Direct Investment (FDI)
FDI is the investment made by a company in a foreign country to start its operations. Various options available for an FDI are as follows:
Whole owned subsidiary – This option is viable if a company is willing to take all the risks of all the operations pertaining to its business in a foreign country. A subsidiary can be formed from scratch (green field investment) to manufacture and market its products and services in a foreign country. A firm can also export its products or services to other countries from its subsidiaries. American Airlines is a wholly owned subsidiary of AMR Corp.
Joint Ventures (JV) –This is a very popular mode of entry into foreign markets, as it minimises business risk and investment. It is owned by one or more firms in proportion to their investment. If a JV is done with an existing competitor, it could be termed as a strategic alliance. Sony Ericsson is an example of joint venture between Sony, a Japanese company and Ericsson, a Swedish company.
Merger or acquisition – A company can merge into or acquire an existing company with established operations in a foreign country. It saves a lot of time in construction initial setup, and regulatory approvals and so on. In the bargain, the acquiring company can use all the established brand names, distribution networks and so on of the acquired company. Eg. Proctor and Gamble.
Strategic investment – Any firm can purchase a stake in a foreign company, whereby they are entitled to a share in the profits, if any. The shareholding can be a minority stake and may be without voting rights. Generally, the investing company does not participate in the management of the target company