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Copyright @ Oxford University Press International Business R. M. JoshiChapter 11: Modes of International Business ExpansionInternational BusinessRakesh Mohan Joshi Professor & Chairperson, IIFT New Delhi 1
Copyright @ Oxford University Press International Business R. M. Joshi
Copyright @ Oxford University Press International Business R. M. JoshiChapter 11: Modes of International Business ExpansionMODES OF INTERNATIONAL BUSINESS EXPANSION Chapter 11
Copyright @ Oxford University Press International Business R. M. Joshi
Copyright @ Oxford University Press International Business R. M. JoshiChapter 11: Modes of International Business ExpansionLearning Objectives
To explain the concept of expansion modes for international businessTo examine strategic trade-offs in selecting expansion modesTo discuss trade-related expansion modesTo evaluate contractual expansion modesTo elucidate investment modes of expansionTo explicate strategy for selecting the expansion modesTo elaborate the decision making process for selecting the expansion modes
Copyright @ Oxford University Press International Business R. M. Joshi
Copyright @ Oxford University Press International Business R. M. JoshiChapter 11: Modes of International Business ExpansionModes 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
Copyright @ Oxford University Press International Business R. M. JoshiChapter 11: Modes of International Business ExpansionFactors 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 expansionTypes of return anticipated from overseas operationsExtent of control to be exerted in firms foreign operations Level of externalisation of firms resources including its intellectual propertyDesired flexibility of expansion modes
Copyright @ Oxford University Press International Business R. M. Joshi
Copyright @ Oxford University Press International Business R. M. JoshiChapter 11: Modes of International Business ExpansionTrade Related ModesExpansion 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 in geographically diverse countries.
Copyright @ Oxford University Press International Business R. M. Joshi
Copyright @ Oxford University Press International Business R. M. JoshiChapter 11: Modes of International Business ExpansionExports
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.
Copyright @ Oxford University Press International Business R. M. Joshi
Copyright @ Oxford University Press International Business R. M. JoshiChapter 11: Modes of International Business ExpansionIndirect 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.
Copyright @ Oxford University Press International Business R. M. Joshi
Copyright @ Oxford University Press International Business R. M. JoshiChapter 11: Modes of International Business ExpansionAgents
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 AgentsImporters buying agentsCountry-controlled buying agentsBuying offices
Copyright @ Oxford University Press International Business R. M. Joshi
Copyright @ Oxford University Press International Business R. M. JoshiChapter 11: Modes of International Business ExpansionMerchant Intermediaries
Exports intermediaries that buy and sell goods for a profit and take title of the goods and assume risks thereof.
Copyright @ Oxford University Press International Business R. M. Joshi
Copyright @ Oxford University Press International Business R. M. JoshiChapter 11: Modes of International Business ExpansionMerchant Exporters
They collect produce from several manufacturers or producers, export directly in their own name and work on profit margins.
Copyright @ Oxford University Press International Business R. M. Joshi
Copyright @ Oxford University Press International Business R. M. JoshiChapter 11: Modes of International Business ExpansionInternational 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.
Copyright @ Oxford University Press International Business R. M. Joshi
Copyright @ Oxford University Press International Business R. M. JoshiChapter 11: Modes of International Business ExpansionTrading/Export HousesHome-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.
Copyright @ Oxford University Press International Business R. M. Joshi
Copyright @ Oxford University Press International Business R. M. JoshiChapter 11: Modes of International Business ExpansionDirect Exports
Making domestically produced products available in foreign markets without employing any market intermediary in the home county. It does not mean that the goods are sold directly to foreign-based end customers.
Copyright @ Oxford University Press International Business R. M. Joshi
Copyright @ Oxford University Press International Business R. M. JoshiChapter 11: Modes of International Business ExpansionManufacturers Export Agents or Sales RepresentativesThe 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.
Copyright @ Oxford University Press International Business R. M. Joshi
Copyright @ Oxford University Press International Business R. M. JoshiChapter 11: Modes of International Business ExpansionOverseas-based Buying Agents
Foreign based agents that have exclusive contract arrangements to perform the exporting firms business, generally paid on the basis of a specific percentage of profit and the cost incurred.
Copyright @ Oxford University Press International Business R. M. Joshi
Copyright @ Oxford University Press International Business R. M. JoshiChapter 11: Modes of International Business ExpansionMerchant importersAn 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..
Copyright @ Oxford University Press International Business R. M. Joshi
Copyright @ Oxford University Press International Business R. M. JoshiChapter 11: Modes of International Business ExpansionDistributorsThe 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.
Copyright @ Oxford University Press International Business R. M. Joshi
Copyright @ Oxford University Press International Business R. M. JoshiChapter 11: Modes of International Business ExpansionPiggybacking (Complementary Exports) Use of well-established distribution network of another company in foreign country.
Copyright @ Oxford University Press International Business R. M. Joshi
Copyright @ Oxford University Press International Business R. M. JoshiChapter 11: Modes of International Business ExpansionCounter-Trade
Various forms of trade arrangements wherein the payment is in form of 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.
Copyright @ Oxford University Press International Business R. M. Joshi
Copyright @ Oxford University Press International Business R. M. JoshiChapter 11: Modes of International Business ExpansionForms of Counter-TradeSimple barter: Direct and simultaneous exchange of goods without use of money. 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.
Copyright @ Oxford University Press International Business R. M. Joshi
Copyright @ Oxford University Press International Business R. M. JoshiChapter 11: Modes of International Business ExpansionCounter purchase: A deal involving two separate transactions payable in hard currency, each with its own cash value.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.
Copyright @ Oxford University Press International Business R. M. Joshi
Copyright @ Oxford University Press International Business R. M. JoshiChapter 11: Modes of International Business Expansione-Modes of Business Expansion
Use of information and communication technology for expanding business internationally.
Copyright @ Oxford University Press International Business R. M. Joshi
Copyright @ Oxford University Press International Business R. M. JoshiChapter 11: Modes of International Business ExpansionContractual Modes of Business ExpansionMaking 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.
Copyright @ Oxford University Press International Business R. M. Joshi
Copyright @ Oxford University Press International Business R. M. JoshiChapter 11: Modes of International Business ExpansionInternational 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.
Copyright @ Oxford University Press International Business R. M. Joshi
Copyright @ Oxford University Press International Business R. M. JoshiChapter 11: Modes of International Business ExpansionInternational Contract Manufacturing
A contractual arrangement under which a firms manufacturing operations are carried out in foreign countries.
Copyright @ Oxford University Press International Business R. M. Joshi
Copyright @ Oxford University Press International Business R. M. JoshiChapter 11: Modes of International Business ExpansionInternational Management Contracts
Providing managerial and technical expertise to an overseas firm on contractual basis.
Copyright @ Oxford University Press International Business R. M. Joshi
Copyright @ Oxford University Press International Business R. M. JoshiChapter 11: Modes of International Business ExpansionInternational Turnkey ProjectConceptualizing, designing, constructing, installing, and carrying out preliminary testing of manufacturing facilities or engineering projects at overseas locations for a client organization.
Copyright @ Oxford University Press International Business R. M. Joshi
Copyright @ Oxford University Press International Business R. M. JoshiChapter 11: Modes of International Business ExpansionInternational Leasing
Making available new and used equipment through a foreign-based firm for use, in return of a fee called leasing fee.
Copyright @ Oxford University Press International Business R. M. Joshi
Copyright @ Oxford University Press International Business R. M. JoshiChapter 11: Modes of International Business ExpansionInternational 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.
Copyright @ Oxford University Press International Business R. M. Joshi
Copyright @ Oxford University Press International Business R. M. JoshiChapter 11: Modes of International Business ExpansionMajor Types of Licensing Arrangements Process licensingTrade-mark licensingCross-licensing
Copyright @ Oxford University Press International Business R. M. Joshi
Copyright @ Oxford University Press International Business R. M. JoshiChapter 11: Modes of International Business ExpansionInternational 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.
Copyright @ Oxford University Press International Business R. M. Joshi
Copyright @ Oxford University Press International Business R. M. JoshiChapter 11: Modes of International Business ExpansionInvestment 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.
Copyright @ Oxford University Press International Business R. M. Joshi
Copyright @ Oxford University Press International Business R. M. JoshiChapter 11: Modes of International Business ExpansionOverseas AssemblyExports of components, parts or machinery in CKD condition and assembling these parts at a site in a foreign country.
Copyright @ Oxford University Press International Business R. M. Joshi
Copyright @ Oxford University Press International Business R. M. JoshiChapter 11: Modes of International Business ExpansionInternational Joint Venture
Equity participation of two or more firms resulting in formation of a new entity.
Copyright @ Oxford University Press International Business R. M. Joshi
Copyright @ Oxford University Press International Business R. M. JoshiChapter 11: Modes of International Business ExpansionWholly Owned Subsidiary
Setting up a fully owned new entity in a foreign country.
Copyright @ Oxford University Press International Business R. M. Joshi
Copyright @ Oxford University Press International Business R. M. JoshiChapter 11: Modes of International Business ExpansionGreenfield Operations
Creating production and marketing facilities on a firms own from scratch.
Copyright @ Oxford University Press International Business R. M. Joshi
Copyright @ Oxford University Press International Business R. M. JoshiChapter 11: Modes of International Business ExpansionMergers and AcquisitionsTransfer of existing assets of a domestic firm to a foreign firm lead to mergers and acquisitions.Cross-border mergers: a new legal entity emerges by way of 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.
Copyright @ Oxford University Press International Business R. M. Joshi
Copyright @ Oxford University Press International Business R. M. JoshiChapter 11: Modes of International Business ExpansionStrategy for Selecting International Business Expansion Mode Nave rulePragmatic ruleStrategy rule
Copyright @ Oxford University Press International Business R. M. Joshi
Copyright @ Oxford University Press International Business R. M. JoshiChapter 11: Modes of International Business ExpansionMarketing 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.
Copyright @ Oxford University Press International Business R. M. Joshi
Copyright @ Oxford University Press International Business R. M. JoshiChapter 11: Modes of International Business ExpansionSequential Adoption of Business Expansion Modes Platform countries: eg. Singapore and Hong KongEmerging countries: eg. Vietnam, Myanmar, Laos, and CambodiaGrowth countries: eg. China, India, Thailand, Indonesia, Malaysia, and Philippines Maturing countries: eg. Korea and TaiwanEstablished countries: eg. Japan
Copyright @ Oxford University Press International Business R. M. Joshi
Copyright @ Oxford University Press International Business R. M. JoshiChapter 11: Modes of International Business ExpansionDecision-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.
Copyright @ Oxford University Press International Business R. M. Joshi
