Modes of entry in International Business | B.Com | NTA NET 2020
Summary
TLDRIn 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.
Outlines
🌐 Market Expansion Strategies
This video segment discusses the strategic considerations a company must make before expanding into foreign markets. It emphasizes the importance of selecting the right market based on long-term profit potential, economic and political factors, market size, consumer purchasing power, and competitive landscape. The discussion also touches on the various modes of entering a foreign market, including exporting, licensing, franchising, turnkey projects, mergers and acquisitions, and joint ventures. Each mode is briefly explained, highlighting its advantages and the circumstances under which it might be the most suitable choice for a company looking to expand internationally.
Mindmap
Keywords
💡Foreign Expansion
💡Market Selection
💡Exporting
💡Licensing
💡Franchising
💡Turnkey Project
💡Mergers and Acquisitions
💡Joint Venture
💡Intellectual Property
💡Purchasing Power
💡Risk Management
Highlights
The necessity for a company to decide on a market to enter, the timing, and the method of entry before expanding abroad.
Market selection should be based on a nation's long-run profit potential, economic and political factors, market size, consumer purchasing power, and competitive nature.
Exporting as a mode of foreign market entry, defined as the sale of domestically produced goods abroad.
Advantages of exporting include limited financial requirements and reduced risk as the company gradually understands the host country's market.
Licensing as a mode of entry, where a domestic manufacturer grants rights to use its intellectual property to a foreign manufacturer for a fee.
Licensing allows for lower market entry costs and the ability to choose any international location without ownership obligations.
Franchising involves an independent organization operating a business under another company's name, paying a fee for the use of trademarks and operational systems.
Turnkey projects, where a firm agrees to design, construct, and equip a facility for a fixed price, transferring risk to the purchaser.
Mergers and acquisitions as a mode of entry, where a domestic company merges with or purchases a foreign company for immediate access to international facilities and networks.
Joint ventures, where two or more firms create a new business entity with shared ownership, encouraged by various environmental factors.
Joint ventures provide strength in terms of required capital and resources for international business expansion.
The importance of understanding the host country's culture, customer base, and market before full-scale entry.
The strategic decision-making involved in organizing export functions and procuring foreign sales.
The role of licensing in allowing domestic companies to enjoy international market advantages without direct investment.
Franchising as a means for a franchisor to provide continuous support and assurance programs to a franchisee.
Turnkey projects often associated with large-scale infrastructure developments like nuclear power plants and airports.
The strategic considerations for a domestic company when deciding to merge or acquire a foreign company for market entry.
Joint ventures as a collaborative approach to international business expansion, sharing risks and resources.
Transcripts
welcome to bite size Commerce today in
this video we are going to discuss about
the modes of foreign expansion but
before expansion the company has to make
some decisions regarding which market to
enter when to enter and how to enter now
let us have a discussion on where to
expand its business the choice of market
has to be determined based on nation's
long-run profit potential economic and
political factors which influence
foreign markets size of market
purchasing power of the consumers nature
of competition etc next we have how to
enter a foreign market there are many
modes of entering a foreign market
firstly we have exporting it means the
sale abroad of an item produced stored
or processed in the supplying firms home
country it is a convenient method to
increase their sales active exporting
conversely results from a strategic
decision to establish proper systems for
organizing the export functions and for
procuring foreign sales advantages of
exporting firstly we have need for
limited finance if the company selects a
company in the host country to
distribute the company can enter
international market with no or less
financial resources but this amount
would be quite less compared to that
would be necessary under other modes
less risk exporting involves less risk
as the company understand the culture
customer and the market of the host
country gradually later after
understanding the host country the
company can enter on a full scale the
next mode of entry we have is licensing
in this mode of entry the domestic
manufacture releases the right to use
its intellectual property that is
technology copy rights brand name
etcetera to a manufacturer in a foreign
country for a fee hether manufacturer in
the domestic country is called license
around the manufacturer in the foreign
is called licensing the cost of entering
market through this mode is less costly
the domestic company can choose any
international location and enjoy the
advantages without incurring any
obligations and responsibilities of
ownership managerial comma investment
etcetera next we have franchising under
franchising an independent organization
called our franchisee operates the
business under the name of another
company called the franchisor under this
agreement the franchisee pays a fee to
the franchisor the franchisor provides
services like trademarks operating
system product Reata ssin continuous
support system like advertising employee
training reservation services quality
assurances program etcetera to the
franchisee next we have turnkey project
turnkey project is a contract under
which a firm agrees to fully design
construct and equip the manufacturing
business services facility in turn the
project over to the purchase when it is
ready for operation for our immune
aeration like a fixed price payment on
cost-plus basis this form of pricing
allows the company to shift the risk of
inflation enhanced costs to the
purchaser for example nuclear power
plants dart airports oil refinery
national highways railway line etc hence
they are multi-year project next we have
modules and acquisitions in this mode of
entry domestic company selects a foreign
company and merge itself with foreign
company in order to enter international
business alternatively the domestic
company may purchase the foreign company
and acquires
its ownership and control it provides
immediate access to international
manufacturing facilities and marketing
network next we have joint venture in
this mode of entry two or more firms
join together to create a new business
entity that is legally separate and
distinct from its parents it involves
shared ownership various environmental
factors like social technological
economic and political encourage the
formation of joint ventures it provides
strength
in terms of required capital for more
such videos type the topic of your
interest in the comment section thank
you
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