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

Byte Size Commerce

16 Feb 202004:52

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

00:00

🌐 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

Foreign expansion refers to the process by which a company extends its business operations into international markets. In the context of the video, it is the primary theme as the discussion revolves around the strategies and considerations a company must make when planning to expand its business beyond its domestic market.

💡Market Selection

Market selection is the strategic decision-making process by which a company identifies the most suitable foreign markets to enter. The video emphasizes the importance of evaluating factors such as long-run profit potential, economic and political stability, market size, consumer purchasing power, and nature of competition.

💡Exporting

Exporting is one of the modes of foreign market entry discussed in the video. It involves selling products or services produced in the home country to customers in foreign markets. The script highlights that exporting is a convenient method for companies to increase sales and can be done with limited financial resources and less risk, as it allows for gradual understanding of the host country's market.

💡Licensing

Licensing is another mode of foreign market entry where a domestic company grants the right to use its intellectual property, such as technology, copyrights, or brand names, to a foreign manufacturer for a fee. The video explains that licensing is less costly and allows the domestic company to enjoy the advantages of international presence without the obligations of ownership or management.

💡Franchising

Franchising is a business model where an independent organization, or franchisee, operates a business under the name of another company, known as the franchisor. The video describes how franchising involves the franchisee paying a fee to the franchisor in exchange for the use of trademarks, operating systems, and other support services.

💡Turnkey Project

A turnkey project is a type of contract where a firm agrees to design, construct, and equip a facility, such as a manufacturing plant or service facility, and then hand it over to the purchaser when it is ready for operation. The video mentions that this mode allows the company to shift the risk of inflation and enhanced costs to the purchaser, and it is often used for large-scale infrastructure projects.

💡Mergers and Acquisitions

Mergers and acquisitions (M&A) is a mode of entry where a domestic company either merges with or purchases a foreign company to gain access to international business. The video explains that this method provides immediate access to manufacturing facilities and marketing networks, which can be advantageous for rapid expansion.

💡Joint Venture

A joint venture is a business agreement where two or more firms collaborate to create a new business entity that is legally separate from its parent companies. The video highlights that joint ventures are often formed due to various environmental factors and provide strength in terms of required capital and shared resources.

💡Intellectual Property

Intellectual property refers to creations of the mind, such as inventions, literary and artistic works, designs, and symbols, names, and images used in commerce. In the context of the video, intellectual property is significant in modes like licensing, where the rights to use such properties are transferred for a fee.

💡Purchasing Power

Purchasing power is the economic term for the amount of goods and services that can be purchased with a unit of currency. The video emphasizes the importance of considering the purchasing power of consumers in foreign markets when deciding where to expand, as it directly impacts the potential sales and profitability of the business.

💡Risk Management

Risk management is the process of identifying, assessing, and prioritizing risks to an organization's capital and earnings. The video discusses how different modes of foreign expansion, such as exporting and licensing, can be used to manage and mitigate the risks associated with entering foreign markets.

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.