FORMS OF INTERNATIONAL BUSINESS

The firm can sell a physical product abroad, i.e., can export. A firm can locate a
production facility abroad, i.e., engage in foreign direct investment. There's an array
of intermediate forms of international business that can allow a firm to get
international returns on its unique advantages. These include:

Form

Exporting

Licensing

Franchising

What's sold

What's received

Pro's

Con's

1) the only
changes from
domestic
operations entail
foreign
marketing and
documentation;
2) little
investment -typically no
investment
abroad

1) susceptibility
to trade
barriers;
2) logistical
difficulties;
3) less suitable
for service
products
4) susceptibility
to exchange-rate
fluctuation

physical product

sales price (or

countertrade)

technical info,
assistance, and/or
use rights

1) increases
return on
investments in
technology,
licensing fee, and
creativity, or
commitment to use customer
the info or rights
relations;
2) little
additional
capital or time
investment

trademark, on-going
service, some
inputs, shared
marketing expense

1) the agreement
generally
prohibits the
originating firm
from exploiting
the assets in
particular
foreign
markets;
2) quality
control

payment for
1) important
quality control
trademark; payment way of gaining
for inputs used;
foreign returns
share of operating on certain kinds
revenues or profits of customerservice and
tradename
assets; 2) some
control over the
conditions of
sale in the
foreign market;

3) limited
financial
commitment

Management
Contracts

1) contractor
puts up no
capital and bears
salary, benefits, and
no risk; 2)
people, for a period indirect costs; share
useful in foreign
of time
of operating
contexts that
revenues or profits
prohibit (or are
too risky for)
FDI

contractee will
become a
competitor, at
least in the local
market

Turnkey
Operation

1) contractor
bears no risk; 2)
all costs plus fees;
design, construction,
useful in foreign
assumption of
and equipping of a
contexts that
ownership and risk
production facility
prohibit (or are
at end of project
too risky for)
FDI

contractee will
become a
competitor, at
least in the local
market

Contract
Arrangements

avoids currency
expertise, financing,
may be difficult
inputs available in controls and
materials, or
to negotiate a
the foreign country foreignfinished product
fair arrangement
exchange risk

Foreign Direct
Investment

capital,
repatriated profit;
management,
licensing fees;
technology; perhaps transfer payments
key material inputs for inputs

-- joint
see above
ownership

-- sole
see above
ownership

1) control; 2)
profit; 3)
capital and
possibility of tax
operating
avoidance
commitment
through transfer
pricing

see above

1) smaller
investment; 2)
local marketing less control
and production/ over the
procurement
operation
expertise from
local partner

see above

1) larger
commitment; 2)
perceived as a
total control and competitor by
returns
local producers
(if any); 3) risk
of national
expropriation

Importing and Exporting

Importing and exporting are often the simplest ways a business may go global.

Importing is the purchasing abroad, either directly from target suppliers or indirectly through
sales agents and distributors.

Exporting is the selling abroad, either directly to target customers or indirectly by retaining
foreign sales agents and distributors.

Products that are made or grown abroad but sold domestically are called imports and products made or
grown domestically and shipped for sale abroad are exports. People who engage in this type of
international trade are called importers or exporters.
There are innumerable sources of information about exporting and importing. You may wish to consult
the following websites for further information:

A good question is why a country imports or exports certain products. It may be simply that they do not
have that resource internally or that it has an excess of that product. It could also be more complex than
this simple answer. A country may have an absolute or competitive advantage.

Absolute advantage: when a country can produce something more cheaply than any other
country. For example, Saudi Arabia, due to its natural resources, has an absolute advantage in
oil.

Comparative advantage: when a country can make certain items more cheaply or better than
other items relative to other countries. For example, Japan, due to its manufacturing efficiencies,
has a comparative advantage in automobiles.

Licensing
Licensing does not have to be an international arrangement. Licensing may take place completely within
one country. But, it is also a convenient way for a company to spread its products abroad with minimal
risk.
Licensing is an arrangement whereby a firm (the licensor) grants a foreign firm (the licensee) the right
to use intangible property such as a patent, logo, formula, process, etc. The licensee pays a royalty or
percent of the profits to the licensor. Licensing allows a business to go global relatively rapidly and
simply. Rather than trying to export a product directly, incurring shipping costs and delays, among other

barriers, a company can license their methods of doing business to a foreign organization. For example,
rather than blend and bottle a soft drink here and then ship overseas, a company may license a foreign
bottler who produces the soft drink locally using the licensed formula. This may also allow some
adaptation to local tastes and customs.

Franchising
Franchising also does not have to be an international arrangement. Franchising may take place
completely within one country. There are many examples of nationally-based franchises with which we
are sure you are familiar. It is also another convenient way for a company to introduce its products abroad
with minimal risk.
Franchising is a form of licensing in which the parent company (franchisor) offers some combination of
trademark, equipment, materials, managerial guidelines, consulting advice, and cooperative advertising to
the investor (franchisee) for a fee and/or percentage of revenues (royalties). As with licensing,
franchising allows a business to go global relatively rapidly and simply, however, franchising generally
requires a greater commitment, financially and otherwise, than licensing by both parties. The most
obvious example is the ubiquitous McDonalds franchise. Some other examples are Starbucks or hotel
chains such as Hilton. Franchising may also allow some adaptation to local tastes and customs.

Foreign Direct Investment

Foreign direct investment occurs when a company invests resources and personnel to build or
purchase an operation in another country. This turns the firm into a multinational company (MNC).
A wholly owned subsidiary is a firm that is owned 100% by a foreign firm
This is a major decision for an organization because costs and risks of direct investment are greater than
with franchising or licensing. Although governments usually welcome foreign direct investment, they are
also often concerned about this type of investment for several reasons. Due to their size, MNCs may
influence the host countrys economic and political systems. Control of a countrys important resources
may pass into the hands of foreign corporations and, perhaps, then governments. Some countries enact
programs to counteract these concerns.

Joint Ventures and Strategic Alliances

Joint ventures and strategic alliances are somewhat different from foreign direct investment in that we are
not talking about creating wholly owned subsidiaries. Yet, they can be excellent, strategic ways to
penetrate different global markets around the world while limiting exposure at the entry phase.
A joint venture is an organization created by two or more companies or a company and a foreign
government in which each party contributes assets, owns the entity to some degree, and shares risk. A
joint venture allows a company to partner with a firm from another country thus learning about business
practices, cultural differences, etc. This is particularly popular among manufacturing concerns. For
example, Ford Motor Company (U.S.) entered into a joint venture with the Mazda Company (Japan) and
France's PSA Peugeot Citroen has joined with Chinas Dongfeng Motor Corp.
A strategic alliance is an agreement between potential or actual competitors to achieve common
objectives. Unlike a joint venture they do not actually form a new entity but work cooperatively while
maintaining their independence. It allows participants to share costs and risks and to take advantages of
each other strengths. Because strategic alliances are built on trust, this type of arrangement should be
undertaken with care. A good example of international strategic alliance is the code sharing done by

airlines. For example, you may purchase a ticket in the U.S. on Delta airlines for a flight to Italy and find
yourself actually on an Alitalia flight carrying a Delta flight number.

There are number of ways for internationalization / globalization of business. these are referred as foreign market
entry strategies. Each of these ways has certain advantages and disadvantages. One strategy for a particular
business may not be very suitable for another business with different environment. Therefore it is quite common that
a company employs different strategies for different markets.
The different strategies are :
1.

Imports : Imports is defined as goods and services produced by host country and purchased by parent
country. it is reverse process of Exports.

2.

Exports : Exports is defined as goods and services produced in one country then get marketed to other
country.

3.

Foreign Direct Investment (FDI) : Here funds are invested in equity from parent country to a host country.
Rich countries invest funds in growth industries and geographic areas of economic development.

4.

Licensing : Licensing which involve minimal commitment of resources and effort on the part of the
international marketer, are easy ways of entering the foreign markets. Under international licensing, a firm in
one country (the licensor) permits a firm in one country permits the firm in another country to use the intellectual
property (such as patents, trademarks, copyrights, technology, technical know how, marketing skill or some
other specific skill). The monetary benefits to the licensor is the royalty fees, which the licensee pays.

5.

Franchising : Franchising is giving right at a parent company (Franchiser) to another company (Franchisee)
using his name selling his products, do business in a prescribed manner and get advantage of brands of parent
company.

6.

Joint Venture : It is a mutual agreement of two or more partners across globe to collectively own the
company to produce goods and services. This will be pooling the resources to mutual advantages.

7.

Manufacturing in Foreign Country : When a company finds better economy in manufacturing in host country
due to lower costs of materials labour or duties the manufacturing is undertaken in host country. The local
conditions in host country should support manufacturing and marketing activities.

8.

Management Contracts : The foreign country needs management expertise in managing existing or a sick
company this method is used. Under management contract the service provided gets fees or shares in the
company. The contracts is for a specific period.

9.

Consultancy Services

10.

Strategic Partnerships : The positive aspect of two companies in different countries are joined together. The
resources are pooled together to produce new marketable products. This will put both companies in win-win
situations .

11.

Mergers : A Corporate Merger is a combining of corporations in which one of two or more corporations
survives and works for common objectives. These are several types of mergers with a variety of filing
requirements based on number of corporations merging and the type of merger.

12.

Counter Trades : Counter trade is a form of international trade in which certain exports and import
transactions are directly linked with each other and in which imports of goods are paid for by exports of goods,
instead of money payments.

Main Difference Between Domestic and international Business are as follows :

S.No

International Business

Domestic Business

1.

It is extension of Domestic Business and

The Domestic Business Follow the marketing

Marketing Principles remain same.

Principles

Difference is customs, cultural factors

No such difference. In a large countries

2.

languages likeIndia, we have many languages.

3.

Conduct and selling procedure changes

Selling Procedures remain unaltered

4.

Working environment and management practices No such changes are necessary

change to suit local conditions.

5.

Will have to face restrictions in trade practices,

These have little or no impact on Domestic trade.

licenses and government rules.

6.

Long Distances and hence more transaction time. Short Distances, quick business is possible.

7.

Currency, interest rates, taxation, inflation and

Currency, interest rates, taxation, inflation and

economy have impact on trade.

economy have little or no impact on Domestic

Trade.

8.

MNCs have perfected principles, procedures and No such experience or exposure.

practices at international level

9.

MNCs take advantage of location economies

No such advantage once plant is built it cannot be

wherever cheaper resources available.

easily shifted.

Large companies enjoy benefits of experience

It is possible to get this benefit through

curve

collaborators.

11.

High Volume cost advantage.

Cost Advantage by automation, new methods etc.

12.

Global Standardization

No such advantage

13.

Global business seeks to create new values and No such advantage

10.

global brand image.

14.

Can Shift production bases to different countries

No such advantage and get competition from

whenever there are problems in taxes or markets some spurious or SSI Unit who get patronage of
Government.