Modes of Entry into International Business

What is International Business?

A person cannot meet all of his requirements using only his available resources. He needs to trade goods and services with other people. In a similar way, a nation may meet all of its needs using its own resources. But, there are some circumstances where it must depend on other nations. This dependence on a single country for any given good is entirely due to the natural resources of that country. The items created in this manner are first consumed domestically in a country and the excess is exported to other countries. In exchange for this sale, the country makes purchases of goods that are not widely available in that country. Hence, supply and demand are in balance. This trade between the two countries is known as international business. In simple terms, international business refers to those business activities that take place beyond the geographical limits of a country. It includes not just international trade in products and services, but also capital, labour, technology, and intellectual property such as patents, trademarks, and copyrights.

Modes of Entry into International Business

A corporation can enter into international trade in a variety of ways listed below:

1. Exporting and Importing

Exporting and Importing is a very common mode to enter into International business. Selling goods and services to a company in a foreign country is referred to as Exporting. For instance, Gulab sold sweets to a store in Canada. Purchasing goods from a foreign company is known as Importing. For instance, the purchase of dolls from a Chinese company by an Indian dolls dealer. Exports and imports are the typical way through which businesses begin their activities overseas before moving on to other kinds of international trade.

Important Ways to Export and Import

i) Direct Importing/ Exporting:  The company handles all of the necessary paperwork for the shipment and financing of goods and services and deals directly with foreign suppliers or purchasers.

ii) Indirect Importing/ Exporting: The company uses a middleman to handle all the paperwork and negotiate with foreign suppliers or customers. The firm’s involvement is limited.

2. Contract Manufacturing

According to Contract Manufacturing, every well-known company in a nation accepts responsibility for promoting the goods and services created by a business in another nation. Here, the company is specialised in the manufacturing process but lacks marketing skills, whereas the other company, due to its established reputation, is capable of selling those items and services. Offering these items and services is not the primary business of these organisations, but they do it for the benefit of their name and reputation, as well as to provide high-quality products at a low cost to their customers.

Contract manufacturing is a type of international business, in which a firm enters into a contract with another firm in a foreign country to manufacture certain components or goods as per its specifications.

Multinational firms, like Maybelline, Loreal, Levis, and others use contract manufacturing to have their products or component parts produced in developing nations. Contract manufacturing is also known as international outsourcing.

3. Licensing

When a corporation from one country (the Licensor) grants a license to a company from another country (the Licensee) to use its brand, patent, trademark, technology, copyright, marketing skills; etc., to assist the other firm sell its products, this contractual agreement is referred to as Licensing. The licensor corporation receives returns in proportion to sales. Returns may take the form of royalties or fees. In other nations, the government determines how the returns are fixed. This cannot exceed 5% of revenues in several developing nations.

For instance, Pepsi and Fanta are made and distributed globally by local bottlers in other nations under the licensing system.

The company that provides such authorisation is known as the Licensor while the other company in a different country that receives these rights is known as the Licensee. The mutual sharing of knowledge, technology, and/or patents between the companies is called Cross-licensing.

4. Franchising

The franchise is the unique right or freedom that a producer grants to a certain person or group of people to establish the same business at a specific location. The producers use this contemporary business model to market their products in far-off locations. In general, producers who have a good reputation use this system. Individuals are motivated by their goodwill and try this mode of business in order to earn profit.

Franchising is a contractual agreement that involves the grant of rights by one party to another for use of technology, trademark, and patents in return for the agreed payment for a certain period of time.  

The business that gives the rights (i.e., the parent company) is referred to as the Franchisor, and the business that purchases the rights is referred to as the Franchisee.

5. Joint Ventures

A joint venture is formed when two or more businesses decide to work together for a common goal and mutual benefit. These two commercial entities could be private, public, or foreign-owned. Joint ventures are those types of businesses that are established in international trade where both domestic and foreign entrepreneurs are partners in ownership and management. The trade is carried out in collaboration with the importing nation’s firm. For instance, the Joint venture of the Indian company Maruti with the Japanese Company Suzuki. 

6. Wholly Owned Subsidiary

When a foreign company establishes a business unit or acquires a full stake in any domestic company, then they are called a Wholly-owned Subsidiary. Wholly owned subsidiaries are set by a foreign company to enjoy full control over their overseas operations. A wholly-owned subsidiary in a foreign country may be established in two ways:

• Setting up of wholly-owned new firm in the foreign land, also called Green Field Venture.
• Acquiring an established firm in a foreign country and using that firm to do business in a foreign country.