Modes of entry in International Business | B.Com | NTA NET 2020

Summary

In this Bite Size Commerce video, we delve into the strategic considerations for businesses looking to expand internationally. We explore the critical decision-making process regarding market selection, influenced by factors like profit potential, economic and political stability, market size, consumer purchasing power, and competitive landscape. The video outlines various entry modes, including exporting, licensing, franchising, turnkey projects, mergers and acquisitions, and joint ventures, each with its advantages and risks. This comprehensive guide equips businesses with the knowledge to navigate the complexities of foreign market entry.

Takeaways

• 🌐 Companies must decide on the market to enter, the timing, and the method of entry before expanding internationally.
• 📈 Market selection should consider long-term profit potential, economic and political factors, market size, consumer purchasing power, and competition.
• 🚢 Exporting is a convenient method to increase sales and involves selling products produced in the home country to foreign markets.
• 💼 Active exporting requires establishing systems for organizing export functions and procuring foreign sales.
• 💰 Exporting offers advantages such as limited financial needs and lower risk, allowing companies to understand the host country's culture and market gradually.
• 🔑 Licensing involves granting the right to use intellectual property like technology, copyrights, or brand names to a foreign manufacturer for a fee.
• 🏢 Franchising is an agreement where a franchisee operates a business under the franchisor's name, paying a fee for the use of trademarks and operational support.
• 🏭 Turnkey projects are contracts where a firm designs, constructs, and equips a facility, then hands it over to the purchaser when ready for operation.
• 🔄 Mergers and acquisitions allow a domestic company to enter international business by merging with or purchasing a foreign company, gaining access to manufacturing and marketing networks.
• 🤝 Joint ventures are formed when two or more firms create a new business entity with shared ownership, encouraged by various environmental factors.

Q & A

What are the key decisions a company must make before expanding into foreign markets?

Before expanding, a company must decide which market to enter, when to enter, and how to enter. This involves assessing the nation's long-run profit potential, economic and political factors, market size, consumer purchasing power, and the nature of competition.

What factors influence a company's choice of market for foreign expansion?

The choice of market for expansion is influenced by factors such as the nation's long-run profit potential, economic and political factors, market size, purchasing power of consumers, and the nature of competition.

What are the advantages of exporting as a mode of entering a foreign market?

Exporting has several advantages: it requires limited finance, involves less risk as the company can understand the host country's culture, customers, and market gradually, and allows the company to enter the international market with minimal financial resources.

What is licensing and how does it benefit a company entering a foreign market?

Licensing is a mode where a domestic manufacturer releases the right to use its intellectual property to a foreign manufacturer for a fee. It is cost-effective, allows the domestic company to choose any international location, and provides advantages without incurring ownership, managerial, or investment responsibilities.

How does franchising differ from licensing, and what are its benefits?

Franchising involves an independent organization (franchisee) operating a business under another company's (franchisor) name. The franchisee pays a fee and receives services like trademarks, operating systems, and continuous support. Benefits include access to an established brand and support systems.

What is a turnkey project in the context of foreign market entry, and how does it mitigate risks?

A turnkey project is a contract where a firm agrees to design, construct, and equip a facility, then hand it over to the purchaser when ready for operation. It allows the company to shift the risk of inflation and enhanced costs to the purchaser, often used for large infrastructure projects.

What are the two primary ways a domestic company can merge with a foreign company to enter international business?

A domestic company can either merge with a foreign company to form a new business entity (joint venture) or purchase the foreign company to acquire its ownership and control.

What is a joint venture, and what are the environmental factors that encourage its formation?

A joint venture is a new business entity created by two or more firms, legally separate from its parents, involving shared ownership. Formation is encouraged by various environmental factors such as social, technological, economic, and political considerations.

How does the mode of entry affect the level of risk and financial commitment for a company entering a foreign market?

Different modes of entry, such as exporting, licensing, franchising, turnkey projects, mergers, and acquisitions, affect the level of risk and financial commitment. Exporting and licensing typically involve less risk and lower financial commitment, while mergers and acquisitions may require significant investment and carry higher risk.

What are some examples of turnkey projects mentioned in the script?

Examples of turnkey projects include nuclear power plants, airports, oil refineries, national highways, and railway lines.

How does the choice of market entry mode impact a company's control over its operations in a foreign market?

The choice of market entry mode impacts control by determining the level of involvement and decision-making authority a company has. Direct investment through mergers and acquisitions offers more control, while licensing and franchising provide less control but also less risk.