288 33 Powerpoint Slides Chapter 11 Modes International Business Expansion

1
International Business
Rakesh Mohan Joshi Professor & Chairperson, IIFT New Delhi
Copyright @ Oxford University Press International Business R. M. Joshi
Chapter 11: Modes of International Business Expansion
Chapter 11
MODES OF INTERNATIONAL BUSINESS EXPANSION
Learning Objectives
To explain the concept of expansion modes for international business To examine strategic trade-offs in selecting expansion modes To discuss trade-related expansion modes To evaluate contractual expansion modes To elucidate investment modes of expansion To explicate strategy for selecting the expansion modes To elaborate the decision making process for selecting the expansion modes
Modes of International Business Expansion

These are specific forms of entering a foreign
country so as to have international presence and

achieve firms strategic goals. Mode of international business expansion is an institutional mechanism by which a firm expands its operations overseas. Modes of expansion have also been referred to as entry modes in the international business literature.
Copyright @ Oxford University Press International Business R. M. Joshi Chapter 11: Modes of International Business Expansion
Factors Affecting Strategic Trade-offs in Selecting an Expansion Mode
Ability and willingness to commit resources in the target country Magnitude of risk the firm is willing to take in its international expansion Types of return anticipated from overseas operations Extent of control to be exerted in firms foreign operations Level of externalisation of firms resources including its intellectual property Desired flexibility of expansion modes
Trade Related Modes

Expansion modes that employ some form of trade to expand business in foreign countries. Trade related modes are low- risk expansion modes, highly suitable for simultaneous expansion countries.
in
geographically
diverse
Exports
Manufacturing the goods in the home country or a third country and shipping them for sales to a country other than the country of production.
Export is the most common initial mode of

entry into foreign markets as it involves
much lower risks and is a low cost and

simple mode of entry.
Indirect Exports Selling through an export intermediary based in its home country and does not take care of export activity. In indirect exports, the firm is not required to deal with hassles of export operations, it need little international experience, and much less resource commitment. Indirect exports may take place either through home based agents or through merchant intermediaries.
Agents
Agents do not take the title of the goods and operate on behalf of principal firms, rather than themselves on commission basis.
Types of Export Agents
Importers buying agents

Country-controlled buying agents
Buying offices
Merchant Intermediaries
Exports intermediaries that buy and sell goods for a profit and take title of the goods and assume risks thereof.
Merchant Exporters
They
collect
produce or
from
several export
manufacturers
producers,
directly in their own name and work on
profit margins.
International Trading Companies
Generally large companies that accumulate,
transport, and distribute goods in various

markets. Trading companies have been operating for
centuries as pioneers of international trade.

Trading/Export Houses
Home-country
based
firms
involved
in
international trading activities that serve as

merchant intermediary for exports.
As a part of export development strategies,

most countries facilitate such
trading/exports houses.
Direct Exports
Making available
domestically in foreign
produced markets
products without
employing any market intermediary in the home county. It does not mean that the goods are sold directly to foreign-based end customers.
Manufacturers Export Agents or Sales Representatives The individual intermediaries who operate on a commission basis and travel frequently to overseas markets and carry out business in the name of the firm rather than in their own name. These agents specialize in one or a few countries and offer their services to a number of
manufacturers for non-competing products.
Overseas-based Buying Agents
Foreign based agents that contract arrangements to
have exclusive perform the
exporting firms business, generally paid on

the basis of a specific percentage of profit and the cost incurred.
Merchant importers
An overseas-based trader who imports products and further sells these to a wholesaler or a retailer for a profit. Merchant importers take possession and title of the goods, therefore assuming
risks and responsibilities thereof..

Distributors
The overseas distributors purchase the goods and subsequently sell them either to a market intermediary or to the ultimate customer. The distributors
have contractual agreements with the

exporting manufacturers and deal with
them on a long-term basis.

Piggybacking (Complementary Exports)
Use of well-established distribution network of another company in foreign country.
Counter-Trade
Various wherein
forms the
of
trade is
arrangements in form of
payment
reciprocal commitments for other goods or services rather than an exclusive cash transaction. In addition, trade financing and price-setting are tied together in a single transaction.
Forms of Counter-Trade
Simple
Direct and simultaneous exchange of goods without use of money.
barter:
Clearing arrangement: The transaction of

goods and services that extends an agreed period of time.
Switch trading: Trading involving a third

party, known as switch trader in the transaction to facilitate buying of unwanted goods from the importer and make payment by cash or barter to the exporter.
Counter purchase: A deal involving two

separate transactions payable in currency, each with its own cash value.
hard
Buyback: Often used as a marketing tool to

sell plant and equipment wherein the payment is recovered by way of output from plant and equipment sold.
Offset: Partial payment is made by the
importer in hard currency, besides promising to source inputs from the importing country and also make investment to facilitate production of such goods.
e-Modes of Business Expansion

Use of information and communication technology for expanding business
internationally.
Contractual Modes of Business Expansion

Making use of strategic strengths and resources of a foreign-based partner company for international business expansion. In contractual expansion modes, the partner firms complement each other with one or more of their strategic strengths, such as superior technology, strong brand equity, manufacturing facilities, well-established distribution network, etc.
International Strategic Alliance
Cooperation with one or more than one firm overseas to carry out a business activity
wherein each one contributes its different

capabilities and strengths to the alliance.
International Contract Manufacturing
A contractual arrangement under which a firms manufacturing operations are carried out in foreign countries.
International Management Contracts
Providing managerial and technical expertise to an overseas firm on contractual basis.
International Turnkey Project

Conceptualizing, installing, and designing, carrying out constructing, preliminary
testing
of
manufacturing
facilities
or
engineering projects at overseas locations for a client organization.

International Leasing
Making available new and used equipment through a foreign-based firm for use, in return of a fee called leasing fee.
International Licensing
Making available intangible assets to a foreign company, such as patents, trademarks and copyrights, technical know-
how
and
skills
(technical
guidance,
feasibility and product studies, manuals)
engineering, designs, etc., for a fee termed

as royalty.
Major Types of Licensing Arrangements
Process licensing Trade-mark licensing Cross-licensing
International Franchising
A special form of licensing in which
intangible assets are transferred to a foreign

firm alongwith methods of doing business in
a prescribed manner and other assistance

over an extended period of time in return
for a franchising fee.

Investment Modes of Business Expansion

If a country is found attractive enough to justify a firms long-term commitment,
investment modes of expansion are often adopted.

Overseas Assembly
Exports of components, parts or machinery in CKD condition and assembling these parts at a site in a foreign country.
International Joint Venture
Equity participation of two or more firms resulting in formation of a new entity.
Wholly Owned Subsidiary
Setting up a fully owned new entity in a
foreign country.
Greenfield Operations
Creating production and marketing facilities
on a firms own from scratch.
Mergers and Acquisitions

Transfer of existing assets of a domestic firm to
a foreign firm lead to mergers and acquisitions. Cross-border mergers: emerges by way of a new legal entity merging assets and
operations of firms from more than one country.
Cross-border
acquisition:
involves
transferring management control of assets and operations of a domestic company to a foreign firm. As a result the local firm becomes an affiliate of the foreign company.
Strategy for Selecting International Business Expansion Mode
Nave rule Pragmatic rule
Strategy rule
Marketing Strategy and Expansion Modes

Market penetration strategy: When a
firm focuses itself on a select few countries.
Market-skimming strategy: When a firm

either simultaneously or in quick succession enters a large number of countries.
Sequential Adoption of Business Expansion Modes
Platform countries: eg. Singapore and Hong Kong Emerging countries: eg. Myanmar, Laos, and Cambodia Vietnam,
Growth countries: eg. China, India, Thailand, Indonesia, Malaysia, and Philippines
Maturing countries: eg. Korea and Taiwan Established countries: eg. Japan
Decision-Making Process for Selecting Modes of International Business Expansion

The expansion mode strategy should aim at achieving a firms strategic goals. It
should aim at optimal harnessing of a firms core competencies by way of
international expansion.

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1

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

Chapter 11: Modes of International Business Expansion

MODES OF INTERNATIONAL BUSINESS EXPANSION

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

Chapter 11: Modes of International Business Expansion

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

Modes of International Business Expansion

country so as to have international presence and

Factors Affecting Strategic Trade-offs in Selecting an Expansion Mode

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

Trade Related Modes

Export is the most common initial mode of

much lower risks and is a low cost and

Types of Export Agents

Importers buying agents

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

Chapter 11: Modes of International Business Expansion

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

Chapter 11: Modes of International Business Expansion

directly in their own name and work on

International Trading Companies

Generally large companies that accumulate,

transport, and distribute goods in various

centuries as pioneers of international trade.

international trading activities that serve as

As a part of export development strategies,

manufacturers for non-competing products.

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

Chapter 11: Modes of International Business Expansion

Overseas-based Buying Agents

Foreign based agents that contract arrangements to

have exclusive perform the

exporting firms business, generally paid on

risks and responsibilities thereof..

have contractual agreements with the

them on a long-term basis.

Piggybacking (Complementary Exports)

Use of well-established distribution network of another company in foreign country.

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

Chapter 11: Modes of International Business Expansion

Direct and simultaneous exchange of goods without use of money.

Clearing arrangement: The transaction of

Switch trading: Trading involving a third

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

Chapter 11: Modes of International Business Expansion

Counter purchase: A deal involving two

Buyback: Often used as a marketing tool to

Offset: Partial payment is made by the

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

e-Modes of Business Expansion

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

Chapter 11: Modes of International Business Expansion

Contractual Modes of Business Expansion

International Strategic Alliance

wherein each one contributes its different

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

Chapter 11: Modes of International Business Expansion

International Contract Manufacturing

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

Chapter 11: Modes of International Business Expansion

International Management Contracts

Providing managerial and technical expertise to an overseas firm on contractual basis.