10 Reasons to go

International
The international marketplace offers a world of business opportunities for American companies
seeking to sell or source products worldwide. Not only can you tap into a world marketplace of 7
billion people, but according to business.gov, companies that do international business grow
faster and fail less often than companies that don't.
Written by:
Richard P. Biggs, CEO
Atlantric LLC
Portland, OR, USA
1 678 231 9195 ~ www.atlantric.com

10 Reasons to go InternationalRichard P Biggs|Founder & CEO|Atlantric llc

10 Reasons to go International

If you are pondering whether to go global, recognize the fact that you are global, in that you
very likely have global competitors.
You are in a competitive global marketplace now.
Objectives of Market Entry
Companies decide to go global and enter international markets for a variety of reasons, and these
different objectives at the time of entry should produce different strategies, performance goals,
and even forms of market participation. However, companies often follow a standard market
entry and development strategy. The most common is sometimes referred to as the increasing
commitment method of market development, in which market entry is done via an independent
local partner. As business and confidence grows, a switch to a directly controlled subsidiary is
often enacted. This internationalization approach results from a desire to build a business in the
country- market as quickly as possible and by an initial desire to minimize risk coupled with the
need to learn about the country and market from a low base of knowledge. A few of the more
wide-spread reasons are provided below:Reasons to enter the international marketplace and how to enjoy new export opportunities
1. Increase sales. If your business is succeeding in the U.S., expanding globally will likely
improve overall revenue. Approximately 96% of the worlds population lives outside of the U.S.
and 90% of the worlds population does not speak English this suggests customers are global
and that if your company looks beyond the shores of the domestic market, you have some real
upside potential. If your company has a unique product or technological advantage not available
to international competitors then this advantage should result in major business success abroad.
For example, if you run a software company and add a French and German language version,
you are extending your total market by nearly 200 million.
2. Improve profits. Many export markets are not as competitive as the U.S. and therefore price
pressures are far less ever wonder why a Jaguar car made in Coventry, England costs more in
Coventry than California? It is common practice
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10 Reasons to go InternationalRichard P Biggs|Founder & CEO|Atlantric llc
for U.S. products to be sold at a higher price (and margin) in many export markets
software translated into German is much appreciated by users in Germany and they will
become loyal customers and pay a premium. A U.S. company will often enjoy a far less
competitive landscape if it goes to the trouble of localizing.
3. Short-term security. Your business will be less vulnerable to periodic fluctuations and
downturns in the U.S. economy and marketplace.

4. Long-term security. The U.S. is a large, mature market with intense competition from
domestic and foreign competitors. Additionally, the U.S. currently has excess capacity so
international business trade may become a necessity if you want to keep up in an increasingly
global marketplace and enjoy the potential for cost savings.
5. Increase innovation. Extending your customer base internationally can help you finance new
product development.
6. Exclusivity. Your companys management may have exclusive market information about
foreign customers/prospects, marketplaces or market situations that are not known to others.
7. Economies of scale. Exporting is an excellent way to expand your business with products that
are more widely accepted around the world. In many manufacturing industries, for example,
internationalization can help companies achieve greater scales of economy, especially for
companies from smaller domestic markets. In other cases, a company may seek to exploit a
unique and differentiating advantage (intellectual property), such as a brand, service model, or
patented product. The emphasis should be on more of the same, with relatively little
adjustment to local markets, which would undermine scale economies.
Although the fundamental reason for entering the Global Marketplace is to increase potential
demand, frequently other factors can drive international market investment and performance
measurement decisions. These include:
8. Education. Under certain circumstances, a company might undertake an international market
entry not solely for financial reasons, but to learn. For example, the consumer products division
of Koc, the Turkish conglomerate, entered Germany, regarded as the worlds leading market for
dishwashers, refrigerators, freezers, and washing machines in terms of consumer sophistication
and product specification. In doing so, it recognized that its unknown brand would
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10 Reasons to go InternationalRichard P Biggs|Founder & CEO|Atlantric llc
struggle to gain much market share in this fiercely competitive market. However, Koc took the
view that, as an aspiring global company, it would undoubtedly benefit from participating in the
worlds toughest market and that its own product design and marketing would improve and
enable it to perform better around the world. In most sectors, participation in the lead market
would be a prerequisite for qualifying as a global leader, even if profits in that market were low.
Lead markets include:
United States for software, Japan for consumer electronics, Italy for fashion, Germany for
automobiles and so on. It should be noted that if a company is to maximize learning from a lead
market, it should probably participate with its own subsidiary. Learning indirectly, via a local
distributor or partner, is obviously less effective and will contribute less to the companys
development as a global player.

9. Competitive Strike. Market entry can prompt not by the positive characteristics of the country
identified in a market assessment project, but as a reaction to a competitors moves. A common
scenario is market entry as a follower move, where a company enters the market because a major
competitor has done so. This is obviously driven by the belief that the competitor would gain a
significant advantage if it were allowed to operate alone in that market.
Another frequent scenario is offense as defense, in which a company enters the home market
of a competitorusually in retaliation for an earlier entry into its own domestic market. In this
case, the objective is also to force the competitor to allocate increased resources to an intensified
level of competition.
10.Government Incentives (i.e., cash). It is common for governments to
incentivize their countrys companies to export. This often results in many companies entering
markets they would otherwise not have tackled. The U.S. government offers a wealth of help
when a company decides to begin exporting. Export assistance centers provide a one-stop
resource and can be found in over 100 U.S. Cities. The Small Business Administration (SBA)
offers Export Working Capital Programs that include guaranteed loans of $50,000 to $100,000 to
help exporters grow their business.
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10 Reasons to go InternationalRichard P Biggs|Founder & CEO|Atlantric llc
Summary
International markets evolve rapidly and very often companies struggle to keep up in terms of
their strategy. It is therefore reasonable to deduce that many companies international operations
will consist of a collage of country market operations that pursue different objectives at any one
time. This, in turn, suggests that most companies would adopt different entry modes for different
markets. More commonly, however, is for companies to evolve a template that is followed in
almost all markets. This usually starts with market entry via an indirect distribution channel,
usually a local independent distributor or agent. As there are at least 10 good reasons to go
global, there is no right or wrong approach to entering the International market. Different
circumstances will be prevalent in different markets and for different companies. In all cases I
strongly advise serious thought and much preparation. Research foreign property and understand
the customer culture of your overseas operations.
By taking your products or services international, you are replicating your business for another
set of circumstances, a different locale and culture, with a different market, demands, needs and
expectations. Is it worth it? Absolutely. If you do your homework and get some help from locals
and professionals, going global could be one of the smartest and most profitable moves you've
ever made. Otherwise, you may be overlooking increased sales, new knowledge and experience
and most importantly. higher profits.

ENTRY METHODS
Introduction
In todays global economy, what is the best way for a company to go global, go beyond its shores
and enter untested territories on foreign shores? What is the safest way? What is the most
profitable way? What is the most practical way? These are some of the questions every company
has to answer when it makes globalization as its goal. These are also the issues that every
company has to tackle when it puts its strategy to enter a new market.
In this article, we have short listed a few entry methods that are most often used. Along with
these strategies are the brief descriptions, the advantages and the disadvantages associated with
them. Entry methods or strategies can be broadly classified into two categories:
1)Strategic alliances
2)Standalone entries
In many cases, no company would like to share businesses or profits that it visualizes or expects
in any markets. Often, companies are forced to form strategic alliances while entering new
markets, or for that matter to continue servicing its current markets. This is the result of just one
cause inadequacy, inadequacy related to different resources required to successfully service the
markets and derive profits from it. Some of the important inadequacies that force a company to
consider or even welcome an alliance are:
Capital / capability to take risk
Knowledge/experience about technology
Knowledge/experience about the market
Knowledge/experience about the environment
The nature of the strategic alliance usually depends on what complimentary resources the foreign
company is looking for in its local partner. Strategic alliances can be broken down into the
following types:
1)Joint Ventures
2)Contract Manufacturing
3)Licensing
4)Franchising
5)Exporting

Standalone entries are done by companies which perceive themselves to have adequate capability
in taking capital risk and are ready to gain the knowledge associated with the new markets over
time. Companies that enter new markets on their own have to realize and accept the risk in not
depending on others to gain experience about the new markets.
Joint Venture
The term Joint Venture applies to those strategic alliances where there is equity participation
from both the foreign entrant and the local collaborator. The equity participation can be of
different ratios, ranging from a minority stake, equal stake to a
controlling stake or a more predominant majority stake. From the perspective of the
foreign entrant, a joint venture has the following advantages:
Decrease the capital risk involved.
Leverage the local companys facilities, in manufacturing, distribution and retailing.
Leverage the local companys managerial capability in the local environment.
Leverage the local companys contacts with the government to get green signals.
Many companies avoid having joint venture due to the complexity involved in coordinating
policies, decisions and execution with a different company. There are instances when companies
which have the ability to take the risk involved in entering a new market still enter into joint
venture. This is often a result of the policies laid out by governments in many emerging markets.
For example, China has a policy wherein foreign companies have to enter joint collaboration
with state owned companies to even set up shop there. As in India, the government has policies
which prevent foreign companies from having full ownership in certain industries. In such cases,
foreign companies end up having to enter into joint venture to take advantage of the low cost of
manufacturing and the large size of the markets. Still, the disadvantages or hurdles stay which a
foreign company has to deal with to make its venture successful. Some of disadvantages of joint
venture are:
Difference in culture.
Difference in managerial styles.
Differences in the motivation behind the participation.
Communication problems.
Selection of the right partner.

Other than the above stated hurdles, there are also risks associated with entering in joint venture.
One of the risks is the complication at the time of exit, i.e. when a foreign entrant decides to
leave the market and hence, the joint venture. A very important aspect of an entry strategy is to
have an exit strategy also. The nature of this entry method often results in a very complicated
exit strategy and this is not even under the complete control of the foreign company. The second
major risk is associated with the safety of a companys intellectual property (IP). It is definitely
more difficult to control the access to ones technology when one is not the only entity in charge.
Furthermore, the theft of IP by the local partner is also an issue to deal with, especially in
countries rife with piracy, like China. This probably explains why the majority of companies
which enter markets where wholly owned subsidiaries are allowed, prefer that route over joint
venture.
Contract Manufacturing
Contract manufacturing has a limited role as an entry strategy and is more often used as a
compliment to other entry strategies. It is used in conjunction with strategies like wholly owned
subsidiaries or franchising. Contract Manufacturing is also often used when a company enters a
new market and has an activity that is required but is not a core nor is proprietary in nature, like
the manufacturing of clothes, or simple goods like clothing irons and other consumer goods. In
most of the industries where contract manufacturing is resorted to, the core activities of the
company lie more in marketing and research and
development rather than in manufacturing. Below are the lists of advantages and disadvantages
in resorting to contract manufacturing as an entry method.
Advantages:
Less capital required.
Low managerial risk.
Focus on core activities.
Less complicated exit problems.
Less complicated division of responsibility. Disadvantages:
Chance for a lack of control on certain product parameters.
Differences in quality standards.
Scalability of problems.
Selection of vendors.

A company that seeks to employ contract manufacturing as an entry method needs to carefully
select its contract manufactures/vendors. A wrong decision regarding the selection of a vendor
can result in a bull whip effect along its supply chain in its new market. Such an outcome could
result in a very negative initial experience for the companys customers as well as for the
company itself.
Licensing
Licensing is a common method of international market entry for companies with a distinctive
and legally protected asset, which is a key differentiating element in their marketing offer. It
involves a contractual arrangement whereby a company licenses the
rights to certain technological know-how, design, patents, trademarks and intellectual property to
a foreign company in return for royalties or other kinds of payment. For example, Disney's mode
of entry in Japan had been licensing. Because little investment on the part of the licensor is
required, licensing has the potential to provide a very large ROI. However, because the licensee
produces and markets the product, potential returns from manufacturing and marketing activities
may be lost.
Here are several conditions where licensing is favorable over other entry methods:
Import and investment barriers.
Legal protection possible in target environment.
Low sales potential in target country.
Large cultural distance.
Licensee lacks ability to become a competitor.
Licensing offers businesses many advantages, such as rapid entry into foreign markets and
virtually no capital requirements to establish manufacturing operations abroad. Returns are
usually realized more quickly than for manufacturing ventures. The other major advantage of
licensing is that, despite the low level of local involvement required of the international licensor,
the business is essentially local and is in the shape of the local business that holds the license. As
a result, import barriers such as regulation or tariffs do not apply.
On the other hand, the disadvantages of licensing are that control over use of assets may be lost
over manufacturing and marketing. The licensee usually has to obtain approval from the
international vendor for product design and specification. This is because the licensee is not a
representative of the international vendor and, compared to a
distributor or franchisee, is much more of an independent business that licenses only one specific
and closely defined aspect of the marketing offer. Perhaps, the most important disadvantage of
licensing is to run the risk of creating future local competitors. This is particularly true in

technology businesses, in which a design or process is licensed to a local business, thus revealing
secrets, in the shape of intellectual property that would otherwise not be available to that local
business. In the worst case scenario, the local licensee can end up breaking away from the
international licensor and quite deliberately stealing or imitating the technology. Even in a best
case scenario, the local licensee will certainly benefit from accelerated learning related to the
technology or product category. Participation in international markets via licensing is therefore
best suited to firms with a continuous stream of technological innovation because those
corporations will be able to move on to new products or services that retain a competitive
advantage over imitator ex-licensees.
Licensing to a foreign company requires a carefully crafted licensing agreement. A great care
must be taken to protect trademarks and intellectual property. One way to help ensure that
intellectual property is protected is to secure proper patent and trademark registration. In the
interim before a patent is filed, a potential licensee will be asked to sign a confidentiality and
non-disclosure agreement barring the licensee from manufacturing the product itself, or having it
manufactured through third parties. Also, such agreements should not be in violation of laws in
the host country because rules on licensing vary from country to country.
Franchising
Franchising is one of the entry modes that has been widely used as a rapid method of
international expansion, most notably by fast food chains, consumer service businesses such as
hotel or car rental, and business services. A franchise is an ongoing business relationship where
one party ('the franchisor') grants to another ('the franchisee') the right to distribute goods or
services using the franchisors brand and system in exchange for a fee. Franchising enables rapid
market expansion using the intellectual property of the franchisor, and the capital and enthusiasm
of a network of owner operators. More sophisticated franchise arrangements specify a precise
business format under which the franchisee is expected to carry on business and ensuring a
common customer experience throughout the network such as McDonalds.
Some of the common, but not essential, features of franchised businesses are as follows:
Group purchasing arrangements.
An exclusive territory for each franchisee.
Group advertising programs.
Initial and ongoing training and support from the franchisor.
Assistance from the franchisor with equipment specification, site selection and premises fit-out
and signage.
Franchising is suitable for replication of a business model or format, such as a fast-food retail
format and menu. Since the business format and the operating models and guidelines are fixed,

franchising is limited in its ability to adapt, a key consideration in employing this entry mode
when entering new country-markets. There are two arguments
to counter this. First, the major franchisers are increasingly demonstrating an ability to adapt
their offering to suit local tastes. McDonalds, for example, is far from being a global seller of
American-style burgers, but it offers considerably different menus in different countries and even
different regions of countries. In such cases, the format and perhaps the brand is internationally
consistent, but certain customer-facing elements such as service personnel or individual menu
choices can be tailored to local tastes. Secondly, it must be recognized that there are productmarkets in which customer tastes are quite similar across countries. It is also important to note
that in such businesses, the local service personnel are a vital differentiating factor, and these will
obviously still be local in orientation even if they operate within an internationally consistent
business format.
The main drawback of franchising is the difficulty of adapting the franchised asset or brand to
local market tastes. A key indicator that franchising carries this constraint is the fact that
marketing budgets at local levels are usually restricted to short-term promotions rather than
market development. This is consistent with the concept that franchising is a rapid replication
strategy. For example, Weight Watchers is a highly successful dieting business that franchises its
programs to operators of local clubs and groups of people motivated to lose weight and maintain
their new lighter shape. Its expansion into Mexico, which was the result of an opportunistic
network initiative by a member of the U.S. executives network, encountered some cultural
differences. In some parts of the country, the attitude still prevailed that being overweight was
not bad because it indicated sufficient affluence to eat well. In addition, Mexican consumers
were far less nutritionally aware than their northern counterparts, who encountered extensive
nutritional information on all food products by law. Clearly, market development required heavy
local investment in market education to establish the dieting club concept.
Exporting
Exporting is one of the methods that organizations can use to enter foreign markets. In this entry
method, products produced in one country are marketed in another country through marketing
and distribution channels. Thus, it requires a significant investment in marketing strategies. In
reality, exporting is the most traditional and well-established form of operating in foreign
markets. It can be further categorized into direct or indirect export.
Direct Export: the organization uses an agent, distributor, or overseas subsidiary, or acts via a
Government agency. Usually, companies export through local agents or distributors mainly
because they have local knowledge that is important in conducting the business; they speak the
language, understand the local business, and know who the customers are and how to reach
them.
Indirect Export: products are exported through trading companies (common for commodities like
cotton and cocoa), export management companies, piggybacking and counter-trade. The main
advantage of indirect exporting is that the manufacturer/exporter does not need too much

expertise and can count on trading companies and/or export management companies knowledge.
In the counter-trade method there are two separate contracts involved, one for the delivery and
payment for the goods supplied and the other for the purchase and payment for the goods
imported. The seller, in fact, accepts products and services from the importing country in partial
or total payment for his exports. This
method is suited for situations where competition is low and currency exchange is difficult.
Another option for exporters is to sell products direct to foreign end-users. This option does not
incur intermediary costs and exporters have higher control over price and profits. However, it is
more practical for markets where potential buyers are limited in number or easily identified and
reached. Mail order sales and web-based B2C and B2B sales are the most common forms of
selling direct to end-users.
Additionally, there is a distinction from passive and aggressive exporters. The last relies heavily
in marketing strategies to build awareness and sell its products to foreign markets. In contrast,
passive exporters wait for foreign orders, basically not making additional efforts to generate
sales/export.
As an entry method, exporting has several advantages. Comparing to other methods, exporting is
fairly simple and with low costs/investments and risks. Consequently, it is usually the first entry
method used by organizations in order to obtain knowledge of the foreign market. According to
the exporting results, companies can further decide on entering the market using another method
such as acquisitions, joint ventures, licensing, etc. Other advantages of exporting are increased
utilization of the domestic plant, thus using idle capacity and reducing unit costs through
economies of scale. Exporting also helps in diversifying markets, which reduces the companys
exposure to domestic demand instability.
On the other hand, the disadvantages of exporting include high transport costs, trade barriers,
tariffs, and problems with local agents. In addition, exporters have lower control of distribution
and local agents, face the risk of exchange rate fluctuations, and
are subject to custom duties and taxes in the importing counties. Although exporting costs are
relatively low compared with the other entry methods, to enter and develop these markets
exporters usually incur costs to gain exposure, set up sales and distribution networks, and attract
customers. Furthermore, products might need to be modified or redesigned, including packaging,
in order to meet local requirements or customer preferences. Similarly, linguistic, demographic
and environmental differences demand special attention to ensure exporting success.
Wholly Owned Subsidiaries
Many organizations prefer to establish their presence in foreign markets with 100% ownership
through wholly owned subsidiaries. Under this method, organizations obtain greater control over
operations and higher profits since there is no ownership split agreement. However, such entry
method requires large investments and faces higher risks, especially in the political, legal and

economical arenas. There are two approaches for the wholly owned subsidiaries entry method;
one is through acquisition and the other through greenfield investments.
Greenfield investment means using funds to build an entirely new facility. Even though such
approach entails full control and no risk of cultural conflicts, its costs are extremely high, and
returns on investment are obtained in the long-run due to the extent of time required to build the
facility, start operations, and attain economies of scale and the experience-curve.
In contrast, acquisition allows organizations to get to the foreign market faster. Organizations
taking the acquisition approach use its funds to buy existing facilities and
operations. This is done by acquiring the equity of the firm that previously owned the
facility.
Acquisition as an entry method is preferable in the following situations:
When speed of entry is important for the business success.
When barriers to entry (i.e. high economies of scale of local competitors) can be overcome by
acquisition of a firm in the industry targeted.
When the entering firm lacks competencies important in the new business
area.
Since the organization buys an existing firm, it can take advantage of well- established brands
and existing economies of scale to increase its competitiveness in the new market. However, in
order to be successful, the organization must properly identify potential companies in the
targeted market and conduct a thorough evaluation of the to-be acquired company. The
evaluation process should prevent the organization of overestimating the economic benefits of
the acquisition, as well as underestimating its costs. After the acquisition, the success depends on
how well the integration of both organizations is done. Synergy is essential in this case. Besides
high investments and high risks, most acquisitions difficulties arise from the complexity of
integrating differing corporate cultures, which can generate many unforeseen problems.

Modes Of Entry When Entering

International Market Management
Essay
International business or Global marketing is growing at a fast rate and there are more than 180
nations-sates in the world with different market and profitable potential. However for an
organization to earn sufficient income in the global market it needs to know the right time and
form of market entry mode whilst entering International market (Hill, 2003). Therefore this essay
will focus and assess the need for an organisation to use a range of modes of entry while entering
the international market. In due course it will give an overview on International marketing
literature review, views on variety of entry modes, entry selection criteria, examples based on
cased studies and conclusion.
General Understanding of International marketing refers to marketing of goods and services from
one country to another. Producing and marketing of products in more than one country is also
termed as international or multinational marketing. But according to Mc Auley (2001)
International marketing can be defined quite simply as the performance of business activities
that direct the flow of a companys goods and services to consumers or users in more than one
nation for a profit much similar to domestic marketing. However Kahler (1983) argues and
identifies that International marketing differs from domestic marketing for one basic reason: it
involves doing business with individuals, firms, organizations, and/or government entities in
other countries. The author further argues that the difference between international marketing
and domestic marketing is environmental in nature. Organisations have to accept and deal with it
as the way differences exist. Global customers do have the same basic needs for food and shelter
but, existence of habitual differences, differences in cultural lifestyle, climatic changes and
physical environmental changes also make a huge difference in marketing activities.
For instance, Ford Motor Company manufactures cars in USA but they export and sell in
Germany in spite of having a manufacturing unit in Germany for the German market.
(Kahler,1983). Now this is one way of tapping an international market and exporting goods and
services. However, there are various range of modes of entries that an organisation can choose
while entering international markets these are further identified in detail.
As per Kahler, (1983) some of the basic entry modes are Direct exporting, Indirect exporting,
Foreign Licensing, Joint Venture, Wholly-owned subsidiary, Turnkey Operation and
Management Contract. Further explained in detail.
Indirect export is as a process involving exporting activities without any involvement of the
manufacturing firm. Domestic based intermediaries such as export houses, trading companies,
courier/express services, export management companies, piggybacking,
brokers and jobbers and overseas agent distributors are involved to perform the exporting
activities Mc Auley(2001). In contrast Terpstra and Sarathy, (2000) highlights that in Direct
exporting firms are independently concerned with market contact, market research, pricing of the

products, export process documentation management and physical delivery. These entry modes
have an advantage of low investment and substantial scale economies in terms of sales volume.
But high transportation cost and control over foreign marketing are the concerns (Hill, 2003).
Keegan and Green (2005, pp295) state that Licensing is a contractual arrangement whereby one
company (the licensor) makes a legally protected assets available to another company (the
license) in exchange for royalties, license fees, or some other form of compensation. The
licensed assets may be a brand name, company name, patent, trade secret, or product
formulation. The author further states that the other form of licensing is Franchising. It is a
contract between a parent company-franchisor and a franchisee that allows the franchisee to
operate a business developed by the franchisee in return for a fee and adherence to franchisewide policies and practices. Low or no investment and scattered risk are the benefits for firms.
However, lose control over marketing activities for licensing and quality control for franchising
is a major drawback (Hill, 2003).
Joint ventures is like tying a knot with the foreign operating firm, wherein the company which is
going international has enough equity to have a voice in the management but cannot completely
control the foreign operating firm (Terpstra and Sarathy, 2000).
Features like overcoming legal and cultural barriers and access to local distribution system work
as advantages for joint venture. However, ownership and control have remained an issues to a
certain extent (Cateora and Ghauri, 2000). As per Paliwoda and Ryans Jr (1995) Co-production
arrangement strategies involve long-term relationships between partner firms and typically are
designed to transfer intermediate goods such as knowledge and/or skills between firms in
different countries.
Paliwoda and Ryans (1995, cited in Kogut and singh, 1988) described acquisition as purchasing
sufficient amount of stock in a foreign existing company to acquire control and Green-field
Investment as investment or establishment of a new firm to start-up investments in new facilities
which are wholly owned or represent a joint venture between two or more parties. Acquisition is
easy to execute with the quickest way to establish presence in market place and less risky then
green-field investment. On the other hand green-field helps organisation to build new culture
from scratch and thus create a value in the market place. But formation of hubris hypothesis
(Managers over estimating their ability to create a value) and in clash between the cultures of the
acquiring and acquired firm for acquisition mode and uncertainty of risk over earning potential
for green-field mode are the shortcoming (Hill, 2003).
But Paliwoda and Ryans Jr, (1995) argues that the above mentioned and other entry modes are
clustered and classified in three main categories. Firstly Export Mode which includes Direct and
Indirect exports. Second Contractual and Investment modes consisting of different activities such
as licensing, franchising management contracts,
turnkey contracts, non-equity joint ventures, and technical know-how or co-production
arrangement. Firms approach towards such kind of contractual arrangement is based when firm
is possessing some sort of competitive advantage and are unable to exploit this advantages
because of the restrictions placed on them. Lastly Investment mode includes, Acquisition and

mergers or Greenfield (start-up) investments. These clustered market entry modes have different
characteristics in terms of control, risk involved, resource commitment, flexibility and
ownership, which form as advantages and disadvantages for choosing entry modes shown in
Table 1 (Appendix1 ) (Paliwoda and Ryans 1995).
But it is more significant to identify the stimuli and several other traditional reasons why
organisations approach international market. According to traditional method these Stimuli are
categorized as push and pull factors (Internal and External factors) entirely depended on the
firms internal attribute.
Internal factors constitute of organisation with the owner as a key decision maker who has a
strong desire to spread cost and risk may influence the organisation to approach foreign markets.
Similarly, receiving an unsolicited order, saturated domestic market, competitive pressure and
export motivated programs are the external factors which may instigate companies expanding
international. For example, a firm with an unique product manufactures excess capacity of goods
and has a specific company advantage over the competitor, then it may induce the firm to enter
an international market (Mc Auley, 2001). After considering motivational factors, it is much
important to know, why organisations consider different aspects and factors whilst choosing the
right market entry mode.
According to Agarwal and Rarnaswami (1992) trade-offs between risks and returns are the main
factors influencing the choice of entry mode i.e. firms are bound to choose an entry modes which
offers the highest risk-adjusted returns on investment. But over a period of time with experience
and technical know-how, firms focus on the main factors that determine right entry modes. They
are an advantage of Firm Ownership, Location advantage, advantage of a Market Place and
Internalisation advantages of integrating transactions within the firm relating to low control over
the firms which may be considered as superior since it allows to earn high economies of scales
but also involves high cost expenditures and risk of tapping the right partner .
On the other hand Sarkar and Cavusgil, (1996) highlight in depth points needed to be considered
when choosing the entry modes. These are Product-Market factors; (Issues related to asset
specificity technology issues and marketing complications), Firm/Foreign venture specific
factors; (Firm size and international experience, ownership structure level of diversity and
specific competencies) Host-Market factors; (Political and Economic issues operating risk,
infrastructure and technological strength) and Market Potential home-market factors (market
size, growth rate, product acceptance, product life cycle and managerial expertise). More
specifically it constitutes of Cultural factors; Global industry structure; Global corporate
objectives; Relational dimensions of inter-firm collaborations; Firms bargaining power with
respect to foreign
governments; and Political leverage of the home country government shown in Diagram1
(Appendix).
However Agarwal and Rarnaswami (1992) states that these factors are based on the theory of:
Low resource (investment) and consequently low risk/return alternative. High investment and

consequently high risk/return alternative. Lower investment and low risk, return, and control
commensurate and Low investment and low risk/return alternative.
However Root (1994,6) says that there are three fundamental rules applicable while deciding an
entry mode such as Nave Rule- which considers only one way approach (adopted from the
market We only Export / We only License), Pragmatic Rule- based on the market experience
adopting of low risk entry mode and finally the Strategy Rule - suggests a use of right entry
mode through entry comparison matrix.
After considering the immense analysis on above specific factors and taking into account the
objective of further expansion, foreign manufacturing or extended use of domestic
manufacturing facilities. Search for relevant information sources is carried out, resulting in to
evaluation of acquired data, thus showing feasible entry strategies and company resources
matching their proposed marketing plan is developed. Considering the only one market the entire
analysis will be focused on it. Kahler(1983)
However each entry mode has a significant implication to the firm, it is important to know the
different aspects of the entry mode to be chosen, to be able to achieve the main objective why
organisations use different entry modes. This is further explained by various case studies as
examples based on the above factors and theories.
1st Example: PepsiCo (NYSE: PEP) and PepsiAmericas, Inc. (NYSE: PAS) one of the world's
largest food and beverage companies operating in nearly 200 countries and employing more than
168,000 people worldwide jointly acquired Sandora, LLC in June 2007 through Acquisition,
("Sandora" is a leading juice company in Ukraine) where in Pepsiamerica Inc. holds 60 percent
interest. Strategy (Entry Mode) of acquiring the firm is based on expanding its business portfolio
in Europe, Asian continent and to enter the market prospect, PepsiCo has also been able to use
collaborative ventures in different markets. Since Sandora, LLC has the powerful sales
distribution network and two modern production facilities located in Nikolaev. Acquisition is an
effective and appropriate strategy to achieve the goal of holding strong competitive position in
the international market. Due to the strong asset power, PepsiAmerica is able to leverage the
capabilities and experience of the Sandora team and manage the day-to-day operations of the
business. This establishes higher control and by PepsiCo overseeing the brand development they
obtain higher market presence. (Pepsiamerica.com 2007) [Accessed 20 March 2009]
2nd Example: PepsiCo Inc., Unilever and Starbucks Coffee Co. inked a licensing agreement for
the manufacturing, marketing and distribution of the coffeehouse chain's super premium Tazo
Tea ready-to-drink beverages in the United States and Canada in September 2008. Now Tazo's
ready-to-drink line is a part of Pepsi/Lipton Tea
Partnership, which expands the joint venture between PepsiCo and Unilever, based in
Englewood Cliffs, N.J. The bottled beverages, which currently are sold in Starbucks and other
outlets, are made available nationwide through the PepsiCo bottling system started in midOctober. This results that Foodservice and Seattle's Best Coffee, through licensing achieved
patent rights from PepsiCo. It can also be seen that Starbucks gained medium ownership rights in

the partnership. This move puts Seattle's Best Coffee in a prime position to take their successful
Tazo bottled-tea business to an even higher level."
3rd Example: In January 2008 once again SUBWAY was ranked as the no1# Global Franchises
chain on the list of Top Americas Global Franchises. There are more than 29,000 SUBWAY
restaurants in 86 countries worldwide, including 6,000 conveniently placed in non-traditional
locations, and 5,000 stores outside of the USA and Canada. The reason for choosing franchisee
strategy to enter global market is because it involves medium-high risk, resources, ownership
and medium control & flexibility which help the firm to share the profit and losses.
4th Example: Siemens Enterprise Communications went in to a joint venture with Gores Group,
LLC, which includes 51% ownership and 49% ownership by Siemens Enterprise
Communications (also known as SEN). The joint venture continued under the Siemens brand,
included two of Gores portfolio companies, Enterasys and SER Solutions.
Intellectual property rights including patents and technology licenses of all entities are combined.
The venture is well capitalized with Gore and Siemens investing 350 Million Euros for further
innovation and integration across portfolio companies, and brand value on a global level.
Siemens will continue to be a customer and part of the go to market strategy with other Siemens
entities, including Siemens One to facilitate cross company involvement. This business
transformation is expected to drive growth and expand its footprint and product portfolio and to
drive growth in key parts of the business in the International and North American markets. Here
Siemens Enterprise has a medium- high resource commitment i.e. 49% ownership and risk
involved. Control over the other company is also relatively average, however it is advantageous
for both the firms to extent their portfolio and earn revenue in the market
5th Example: In March 2005 Honda the Japanese car giant manufacturer decided to export cars
from China to Europe through their newly established Export only car factory based in
Guangzhou China. Decision was based on the fact that the factory is targeting the European, as
well as the Asian market, confirming the long-held threat of new competition in a tight market
from the low-cost manufacturing giant of the Far East. China's export-led boom has excluded the
auto industry, as the government limited foreign investment in the industry to 65pc holdings is
another reason for adopting exporting. Here external factors like Japanese domestic competitive
market and manufacturing cost factors play a significant role in choosing the export mode
strategy. Organic growth and manufacturing of cars in the European county and other Asian
country would have been a costly decision for the firm. As well there is always the risk of
uncertainty involved for future market. Therefore this is a wise and effective decision of entry
mode.
Conclusion
Companies in general prefer to enter International markets that rank high in attractiveness, low
market risk and where they can enjoy a competitive advantage. But as literature review reveals
the fact, that International marketing is a much wider concept and it differs from domestic
marketing. However core principal of marketing remains significantly satisfying global customer
need. In order to reach out to the customer need, organisations adopt strong efficient range of

entry strategies to meet the demand market place. Organisations with their incredible managerial
know-how and resource capabilities apply these business literature theories to explore the
markets. By and large these theories do assist firms a right approach and to certain extent
minimise the risk involved. But as analysed earlier every strategy has its own loop holes,
advantages and disadvantages. Therefore it can be hypothesised that there is no perfect black and
white workable mode of strategy which can be accepted and implemented by an organisation to
secure success. As experienced in the above 1st example PepsiAmerica & PepsiCo tapped the
Ukraine market through acquisition, but it was also possible for the company to capture the
market through contractual mode: franchising, which involved low investment and higher control
over the distributor. In 3rd example: Subway has always been using the Nave rule in contractual
strategy of only Franchising to expand internationally. Which involves higher exporting of in
house material and assets from America, and higher importing tax levied in foreign country. It
can be suggested that Subway can choose the investment mode such as acquisition of foreign
local sandwich factory possibly in any free trade zones and enjoy the tax free or low tax benefits
on their import and export activities.

Mode of Entry in IB:

Export: Exporting is the most traditional way of entering into International Business. Export can
be done in two ways:
1.Direct Export Products are sold directly to buyers in target markets either through local sales
representatives or distributors. Sales representatives promote their companys products and do
not take title to the merchandise.
Distributors take ownership of the goods (and the accompanying risk) and usually on-sell
through wholesalers and retailers to end-users.
Advantages of Direct Exports:
Give a higher return on your investment than selling through an agent or distributor
Allows the exporting company to set lower prices and be more competitive
Gives the company a close contact with its customers
Disadvantages of Direct Exports:
The company may not have the services of a foreign intermediary, so it may need more time to
become familiar with the market
The customers or clients may take longer to get to know the company and its
products, and such familiarity is often important when doing business internationally
2.Indirect Export - Products are sold through intermediaries such as agents and trading
companies. Agents may represent one or more indirect exporters in return for commission on
sales.
CONTRACT MANUFACTURING: Under contract manufacturing, a company doing
international marketing contracts with firms in foreign companies to manufacture or assemble
the products while retaining the responsibility of marketing the product. There are a number of
multinationals and affiliates of multinationals which employ this strategy in India in respect of
some of the products they market. Bata Shoe also contracted with a number of cobblers to
produce its footwear and it concentrated on marketing
Advantages of Contract Manufacturing
The company does not have to commit resources for set up production facilities
It frees the company from risk of investing in foreign countries

If idle production capacity is readily available in the foreign country, it enables the marketer to
get started immediately
The cost of production by contract manufacturing is lower than if it were manufacture by the
international firm on account of low wages, lower overheads, tax concessions
It is a less risky way to start business ; if the business does not pick up sufficiently, dropping it
is easy; but if the company had established its own production facilities, , the exit would be
difficult
Disadvantages of Contract Manufacturing
In some cases, there will be loss of potential profits from manufacturing
Reduced control over manufacturing process (may affect quality, delivery schedules, etc.)
Contract manufacturing also has the risk of developing potential competitors.
It would not be suitable in cases of high tech products and cases which involve technical secrets
Reduce learning potential
Potential public relations problems
MANAGEMENT CONTRACTS: A Management Contract is an agreement between two
companies, whereby one company provides managerial assistance, technical expertise &
specialized services to the second company of the agreement for a certain period in return for
monetary compensation in the form of a flat fees, percentage over sales, performance bonus
based on based on profitability, sales growth, production or quality measures.
Management contracts are mostly due to government intervention e.g.
Saudi Arabian Govt. requesting former owners to manage Armco
Delta (USA), Air France and KLM (Dutch) often provide technical and managerial assistance to
small airlines companies owned by Governments
Advantages
Focus firms resources on its area of contracts
Minimal financial exposure
Disadvantages

Potential returns limited by contract expertise

May unintentionally transfer proprietary knowledge and techniques to contractee.
TURNKEY PROJECTS: A turnkey project is a contract under which a firm agrees to fully
design, construct and equip a manufacturing/ business/ service facility and turn the project over
to the purchaser when it is ready for operation, for a remuneration which include: a fixed price &
payment on cost plus basis
E.g. Indonesian turnkey project for construction of a sugar factory to a Japanese firm
Advantages
Focus firms resources on its area of expertise
Avoid all long-term operational risks
Disadvantages
Financial risks in Cost overruns
Construction risks due to delays & problems with suppliers
B.Joint Ventures: A joint venture is an agreement involving two or more organizations that
arrange to produce a product or service through a collectively owned enterprise. It has been one
of the most popular ways of entering a new market.
Typically, it is a 50-50 joint venture in which each of the party holds 50% ownership stake and
contributes a team of managers to share operating control. At times, this stake can be a majority
one so as to ensure tighter control.
Advantages:
Domestic company brings in the knowledge of the domestic market.
The risk is divided between joint-venture partners.
Normally, foreign partner has an option to sell its stake in the venture to another entity.
Limitations:
Limited control over business approach for foreign entity.
Profits have to be shared.
E.g. Danone-Brittania, Hero Honda, Maruti Suzuki

Foreign direct Investment: FDI are investments made to acquire a lasting interest by a resident
entity in one economy in an enterprise resident in another economy. FDI has come to play a
major role in the internationalization of business. This has happened due to changes in
technologies, improved trade and investment policies of governments, regulatory environment in
terms of liberalization and easing of restrictions on foreign investments and acquisitions, and
deregulation and privatization of many industries.
Building new facilities (the Greenfield strategy): Starting the operations of the company from
scratch in foreign country
Buying existing assets in a foreign country (acquisition strategy)
Advantages
High profit potential
Maintain control over operations
Acquire knowledge of local market
Avoid tariffs and NTBs
Disadvantages
High financial and managerial investments
Higher exposure to political risk
Vulnerability to restrictions on foreign investment
Greater managerial complexity
Licensing: It is a legal agreement between the owner of intellectual property such as a copyright,
patent or trademark and someone who wants to use that IP.
The licensee pays rent to the licensor for the use of an idea/product/process that is otherwise
protected by IP law. Like a lease on a building, the license is for a specific period of time. The
licensee uses that idea/product/process to sell products or services and earns money.
Advantages:
Licensing appeals to prospective global players because it does not require large capital
investment not detailed involvement with foreign customers. By generating royalty income,
licensing provides an opportunity to exploit research and development already conducted. After
initial costs, the licensor can reap benefits until the end of license contract period.

It reduces the risk of expropriation because the licensee is a local company that can provide
leverage against government action.
Helps avoid host country regulations that are more prevalent in equity ventures.
Provides a way of testing foreign markets without significant resources.
Can be used as preemption major in new market before the entry of competition.
Limitations:
Limited form of market entry which does not guarantee a basis for expansion.
Licensor may create more competition in exchange of royalty.
Franchising: It involves granting of rights by a parent company to another (franchisee) to do
business in a prescribed manner. This right can take the form of selling the franchisers products,
using its name, production and marketing techniques or using its general business approach.
It allows provides a network of interdependent business relationships that allows a number of
people to share brand identification, successful method of doing business, proven marketing and
distribution system.
Franchise agreement typically requires the payment of a fee upfront and then a percentage on
sales. In return, the franchiser provides assistance and at times may require the purchase of goods
or supplies to ensure the same quality of goods or services worldwide. Franchising is adaptable
to international arena and requires minor modification for the local market. It can be beneficial to
both groups. Franchiser has a new stream of income and the franchisee gets time proven
concept/product which can be quickly bought to the market.
Major Forms of Franchising:
manufacturer-retailer system (e.g. car dealership)
manufacturer-wholesaler system (e.g. soft-drink companies)
service firm retailer system (fast-food, hotel) e,g, McDonalds
Dimension

Domestic Business
The economic,

1.

political,

socio-cultural, competitive, and

International Business
legal,

The environment is not fully

known.
Innumerable hidden factors that
may

Environment
2.
strategy

are

Plan and Can be worked out for the shortterm and carried forward to the
long-term.

3.
Competitive
and
their
intensity
4. Currencies
and
their
movements

5.
risks

technological environments
known.

Only long-term planning and

strategy will work. Strategic inputs
are required in multiples.

The
maximum
domestic International competitive forces
competitive forces operate and one
play a vital role and it is difficult to
can understand their movements as
understand their motive and
they are
movement.
visible.
Local currency is used for
transactions. Costing,
pricing,
revenues,
andmargins
are
computed in a single currency.
Volatility may have a minimum
impact on the business in the short
term. One can overcome this
easily.

Business Comparatively, one

can predict
future risks and shocks, and these
will not have a major impact on the
businesses
background.

6. Research

emerge any time and pose problems.

They will lead to pitfalls.

with

strong

It is reasonable and easy to

conduct
Business
research and demand
analysis and customer surveys. It is
also reliable.

Transactions are carried out in

various currencies. Fluctuations in
cross-currency movement and
associated risks are
common.
Currency fluctuation influences
pricing, as well as costing and
investment decisions.
Very difficult to predict and risks
may crop up at any time due to
political situations, the society
itself,
as well as several other unknown
factors.
Very expensive and difficult to
conduct:
Reliability criteriadepend on
individual countries and there is no
uniformity in the output and
findings.

7.
Human Due to past established systems,
resources
corporations can succeed even if
the
humanresources have
minimum skills
and knowledge.
Team commitments are evaluated
and appraised.

Multilingual, multi-strategic, and

multi-cultural human resources,
which should be able to withstand
large risks. Every individual is a
profit centre and hence, accountable.

8.
Narrowed down to work in a single
Organization country with a steady growth
al
objective. Each one will easily

Broad to cover many countries.

Geographic
and
cultural diversity
may influence the vision.

visionand
objective

understand the
objectives.

vision and

9.
ProductAdapted to the local environment
and usage
as per the requirements of
domestic customers affordability,
beliefs, values, cultural elements
and buying behavior.

Varies from country to country,

subject to regulations. This is
especially true for consumer and
medicinal
items.
Standardization,
adaptability, usage
pattern and
warranties are parts of the product.

10. Legal Only local regulations are fully

aspects
applicable to conductbusiness.
There is minimum adherence to
international regulations related to
IPR.

International regulations and host

country
regulations are applicable.
Advanced
countries impose strict
regulations
compared to LDCs.
Strict
adherence to contractual
obligations is common.

11.
Depending on the size of the
Investment business, one can start with a
and Sourcing minimum investment. Involvement
of regulatory bodies is minimal.
Individual ability and repayment
terms determine the funds.

All
overseas operations except
exports, call for huge investments to
set up and expand the business in
many
countries. Specialregulatory
bodies are involved in the process
since foreign currency is transacted.

12. Pricing A majority of companies use coststrategy

plus margin pricing or competitive
pricing.

Companies
use
marginal cost
pricing,
transfer pricing, or
competitive pricing to succeed.

13.
The business house can use its
Distribution discretion to select any channel to
channels
reach the customer. No restriction
exists here.

Government or
market practice
governs
thedistribution
channel.
Cash and carry, shopping malls, and
mail-order services are becoming
popular in international business.

14. PromotionAdvertising, personal selling and Different countries have different

other promotional methods are notrestrictions.
For
example,
restricted through a strict legal
advertisements for liquor and
framework if they are not socially cigarettes are not permitted in some
objectionable.
countries and campaigns using
female models are banned in others.
15. Logistics Domestic players are involved in International players with advanced
all activities. The cost of logistics technology and
systemsare
is very high.
involved. The
cost
is
proportionately low for physical
movements.

Benefits of MNC
1.MNCs increase investment level and thereby the income and employment in host country.
2.MNCs are vehicles for technology transfer especially for developing countries.
3.MNCs contribute to managerial up gradation in host countries through professional managers
and sophisticated management techniques.
4.MNCs encourage host countries to increase their exports and decrease imports.
5.MNCs work to equalise the cost of factors of production around the world.
6.MNCs provide an efficient means of integrating national economies.
7.MNCs possess an efficient R & D System which contributes to inventions and innovations.
8.MNCs stimulate domestic enterprise to support their own operation, and in the process assist
domestic suppliers.
9.MNCs help increase competition and break domestic monopolies
Criticisms against MNC
1.MNCs technology is designed for worldwide profit maximization, not the development needs
of poor countries.
2.MNCs can evade or undermine national economic autonomy and control. Their activities can
be inimical to national interests of particular countries.
3.MNCs can destroy competition and acquire monopoly powers.
4.MNCs tremendous power poses risks that may threaten sovereignty of the nations in which
they do business.
5.MNCs retard growth and employment in the home country.

6.MNCs cause fast depletion of some of the non-renewable natural resources in the host country.
7.MNCs can pollute the environment, not paying compensation for environmental damages.

8.MNCs avoid taxes through transfer pricing manipulating prices through intra-company
transactions.
9.MNCs undermine local culture and traditions; change the consumption for their benefit.
Models of MNCs
HighGlobal
Transnational
Views the world as a single
Prefers a flexible value chain to
market. Tightly controls global facilitate
local
responsiveness.
operations from headquarters toAdopts
complex
coordination
preserce
focus
on
mechanisms
to
facilitate
global
Integration
standardization
integration
Low International
Global

Multidomestic

Use existing core competence Relies

on foreign

subsidiaries

for
to
Pressure

exploit opportunities in operating

as autonomous

units

foreign markets

to customize
productsand
processes for local markets.

Low

High

Pressure for National Responsiveness

The driving forces of Globalization are as follows
1.Increase in and expansion of technology: Advancements in technology in various areas such as
transportation and communication have made the world a smaller place. Improved means of
transportation and communication help speed up interactions and enhance a managers ability to
oversee foreign operations. The internet allows even small companies to reach global customers
and suppliers. Eg. Traditional Indian handicrafts are sold in countries aborad through the internet.
The pace at which new products are developed and introduced in the marketplace has accelerated
considerably and product life cycles are getting shorter.
2.Liberalization of cross border trade and Resource movements: A lot of the restrictions imposed
by countries on free trade and movement of goods and services in the past have now been lifted
due to the following reasons. The citizens want a greater variety of goods and services at lower
prices. Competition spurs domestic producers to become more efficient trade. It may also push
other countries to reduce barriers in turn

3.Development of services that support international business: Today, we see the growth and
development of various services that facilitate the smooth conduct of international business. Eg.
Banks have made cross border trade easier through bank credit agreements, clearing
arrangements that convert one currency to another etc. Besides banking services, Insurance and
international package delivery services have also played a major role in the expansion of
international trade.
4.Growing consumer pressures: Today consumers are more aware than aware before. Also
purchasing power has increased considerably across the globe with the emergence of developing
nations such as India, China, Brazil etc. Hence more and more people can now afford to buy
products that were earlier considered luxuries. Also the growth of the internet has motivated
consumers to scour across the globe for their needs. Eg. US consumers regularly search for lower
priced prescription drugs from foreign sellers.
5.Increased Global Competition: The pressures, both present and potential of increased foreign
competition are a major factor persuading customers to buy and sell abroad. Eg. Companies may
want to introduce products in markets where their competitors are making in roads or seek
cheaper supplies from countries abroad. In recent times, a lot of companies have merged with or
acquired companies abroad. The number of born global companies are on the rise as well.
These companies have a global focus from the very beginning.
6.Changing political situation: International business has seen considerable progress in the post
cold war period. Also, a Transformation of political and economic policies in countries like
India, China, Vietnam, Former Soviet Union have resulted in increased international trade.
Governments across the globe today are promoting increased liberalization and globalization and
have introduced several programs to support international business.
7.Expanded cross national co-operation: International co-operation between governments has
increased through the implementation of treaties, agreements and consultation in order to gain
reciprocal advantages.
The restraining forces of globalization are as follows
Threats to National Sovereignty
1.Local objectives and policies: Every nation looks to promote its own economic, social and
political objectives. Opening up borders to the movement of free trade can undermine the
priorities of individual nations.
2.Local over dependence: A point of concern for smaller countries could be that over dependence
on larger countries for supplies and sales makes them vulnerable to demands by larger suppliers
and sellers.
3.Cultural Homogeneity: Globalization also tends to homogenize products, companies, work
methods, social structure and even languages. As a result, countries find it difficult to maintain
traditional ways of life that unify and differentiate local cultures.

Economic growth and Environmental stress

1.As globalization brings growth, it consumes more nonrenewable resources causing
considerable environmental damage despoliation through toxic and pesticide run offs into
water bodies, air pollution from factory and vehicle emissions and deforestation can considerably
affect weather and climate.
2.Growing Income Inequality: Even if overall worldwide gains from globalization are positive,
there are bound to be losers. The challenge is to maximize gains from globalization while
simultaneously minimizing the costs borne by losers. Globalization also fosters inequality that
may not be measureable strictly in economic terms.
Purchasing power parity (PPP) is a theory and a technique used to determine the relative value of
currencies. It helps in estimating the amount of adjustment needed on the exchange rate between
countries in order for the exchange to be equivalent to (or on par with) each currency's
purchasing power. It asks how much money would be needed to purchase the same basket of
goods and services in two countries, and uses that to calculate an implicit foreign exchange rate.
Using that PPP rate, an amount of money thus has the same purchasing power in different
countries.
Eg. Suppose a certain basket of goods and services cost $10 in the US and Rs. 450 in India, then
the value of $1=Rs.45. Because this is the parity at which the purchasing power of two nations is
maintained. A Change in purchasing power of any currency will reflect in the exchange rate also.
Hence in this system, the
external value of the currency depends on the domestic purchasing power of that currency in
relation to another.
Purchasing-power parity theory tells us that price differentials between countries are not
sustainable in the long run as market forces will equalize prices between countries and change
exchange rates in doing so.
A frequent example of purchasing power parity manifests itself in the form of the McDonalds
Big Mac index. This index compares the price of the big Mac from different countries in order
to: (1) evaluate exchange rates based upon differences in the prices.
Limitations of the theory
Transportation costs The theory of the law of one price assumed that transportation costs were
negligible and PPP requires the same assumption. However, getting products to and from
different markets can add significant costs to goods. This will cause additional divergence in any
price comparison when the product is applied to the basket of goods in a CPI.
Tariffs and Taxes Once again, for PPP to hold, another key assumption

underlying the law of one price is the abstraction of taxes and tariffs. There can be no imposition
of unequal taxes or tariffs in goods imported or exported across countries, otherwise this would
tend to cause further separation of true price levels between markets.
Costs of Non-tradable goods The theory of PPP asserts that after the barriers to trade are
expunged, the cost of a good such as the Big Mac should be the same across all countries in
which the Big Mac is traded. However, the local price of a Big Mac constitutes more than simply
the ingredients by which it is composed. Also embedded in the local price is the cost associated
with selling and marketing. Even within the same country, the cost of the Big Mac can vary
depending upon costs to lease or rent the restaurant space and pay for utilities such as power,
water, and heat.
Pricing to Market Another contributing factor to deviations from PPP is a firms ability to
mark their products at different price points across different markets. Basic business theory states
that profit maximization can be achieved by pricing as high as is appropriate considering the
elasticity of demand for a product.

INTRODUCTION
International business means more opportunities, but also entails greater risks. Although the
environment for international trade has changed substantially over the years, the risks that
exporters face when selling their products and services in other countries remain essentially the
same. The initial step in managing export risks is an obvious one but one which sometimes
needs to be spelled out: first to identify the source of any risks, and then to manage and lower
those risks to a minimum. Choosing the right partners and the right professional advisers is a
major step in mitigating risk. Bankers, lawyers, insurers and accountants should also be able to
give knowledgeable advice about the risks that may face in overseas markets. This section also
includes information about potential risks associated with travelling and doing business in
overseas markets. Managing risk is one of the primary objectives of firms operating
internationally Nevertheless, current treatments of risk and uncertainty in the international
management literature vary in their use of these terms and tend to look at particular categories of
risks to the exclusion of the risks mentioned elsewhere in management literature. The strategic
management field lacks a generally accepted definition of risk.1 The major uses of the term are
in reference to unanticipated variation or negative variation (i.e., "downside risk") in business
outcome variables such as revenues, costs, profit, market share, and so forth. Managers generally
associate risk with negative outcomes. The concept of risk as performance variance is widely
used in finance, economics, and strategic management. With either the variance or negative
variation under- standings, "risk" refers to variation in corporate outcomes or performance that
cannot be forecast ex ante. The label "risk" has also commonly been assigned to factors either
external or internal to the firm that impact on the risk experienced by the firm. In this sense,
"risk" actually refers to a source of risk. Some common examples of risk referring to risk sources
are terms such as "political risk" and "competitive risk." Such terms link unpredictability in firm
performance to specific uncertain environmental components.
TYPES OF RISK IN INTERNATIONAL BUSINESS IN REFERENCE TO BANGLADESH
Doing business internationally can involve different risks from those encountered domestically
and will be influenced by the country you intend to export to. Here are some of the major risks
firms doing business internationally can face.

Political risk
Major political instability at your export destination can either disrupt or in some cases prevent
completion of export contracts. This type of sovereign risk might include defaults on payments,
exchange transfer blockages, nationalisation of foreign assets, confiscation of property, changes
in government policies or, in extreme instances, revolution and civil war. Some factors to
consider are:
Trade embargos enforced by governments and the international community affect the flow of
goods and services and could affect your delivery of goods and getting paid.
Civil disorder may affect personal security of company staff and contractors.
Political upheaval may occur due to economic factors, natural disasters, civil disorder or
revolution
Whether the local country complies with international law requirements, for example, human
rights, trade sanctions, recognition of personal property rights etc.
Some types of exports may be prohibited under local laws or due to trade embargoes or other
international resolutions
There may be no legal recourse for default in the local country or it becomes uneconomic to
pursue your legal rights
Legal risk
There can be major differences in Australian law and the law of the country you are exporting to.
You need to understand what these differences are and how they could affect your ability to
successfully export your products or services. It is important not to assume that legal processes
will be the same as in Australia, particularly when entering into contractual arrangements.
Some examples of situations where legal issues can create problems for exporters include:

The differences between legal systems for example, common law systems as compared to
civil law systems.
Differences in contract law between countries means tailored advice on contract terms is
important to ensure they are binding and enforceable. As discussed further below, the use of
internationally recognized contracts may alleviate some of these problems.
The question of which laws will apply in disputes.
Patent registration and other Intellectual Property issues.
Product liability laws and any implied consumer warranties.
For exporters of services, occupational health and safety and employment laws may apply
Access to courts and dispute resolution mechanisms. Some countries may not permit local
litigation or place restrictions on the types of claims which can be made.
Taxation and revenue laws
Negligence and misrepresentation laws
Bribery, graft and corruption risk
Bribery, graft and corruption are illegal in most countries around the world. It is a criminal
offence to offer a benefit which is not legitimately due with the intention of influencing a foreign
public official. A benefit is not restricted solely to monetary payments and can take other forms.
Further, it is not necessary to prove any direct benefit to the foreign official - use of an
intermediary is sufficient to make out the offence.
Many other countries also have extraterritorial laws outlawing bribery, including the USA, UK
and other EU nations. Therefore, the risk for anyone engaging in bribery or corruption arises not
only under law, but also the law of the host country and potentially laws of other nations. It also

places an exporter at risk of litigation by those who are affected by illegal conduct, as
demonstrated by recent successful class actions.
Quarantine compliance risk
Most countries have strict quarantine requirements. Before exporting, you need to be aware of
what is and what is not allowed under the relevant quarantine laws of your export destination.
There may also be import restrictions on certain goods and services and you need to ensure that
any proposed exports are permitted under the laws of the local country. Failure to do so can
result in forfeiture or destruction of goods, fines and restrictions on the exporter.
Exchange rate risk
Exchange rate risk can occur because of fluctuations in the value of a currency. Unfortunately,
many exporters have had their profit margins eroded or have even lost money due to exchange
rate fluctuations.
There are a number of ways in which you can protect yourself against this risk, including quoting
your prices in dollars (but many customers do not like this and you may adversely affect the
number of new customers you attract) or hedging against currency fluctuations.
Non-payment risk
The risk of not being paid for your goods or services is a very serious one for exporters,
regardless of the country you are trading with. In order to mitigate this risk, the payment option
you choose should match the level of the risk.
To protect yourself against payment default it is prudent, at least initially, to use payment
methods which provide you with some security such as pre-payment or an Irrevocable Letter of
Credit even for customers in wealthy markets. (bank will be able to provide advice on various
payment options.) There are a number of relatively simple things that can be done to lower the
risk of not being paid. For example, be careful about offering credit terms to customers, and look
into getting credit insurance.

MANAGING RISKS IN INTERNATIONAL BUSINESS

Managing export risks is a process of thinking systematically about all possible undesirable
outcomes before they happen and then setting up procedures that will either avoid or minimise
these risks, or help you to cope with their impact.
There are six basic elements in the risk management process:
Establish the context of the risks
Identify the risks
Assess probability and possible consequences of the risks
Develop strategies to mitigate these risks
Monitor and review the outcomes
Communicate and consult with all parties involved.
Keep your risk management analysis clear and simple, and ensure it is understood by everyone in
the company who is involved in exporting.
Developing a Risk Management Matrix
A Risk Management Matrix will not only clarify your thinking on the risks you may face, but
also give you a guideline to work from in managing or mitigating risks. This document should be
an appendix to Export Plan, heres some examples of what could be included in your risk matrix:
Risk type

Ranking

Consequences

(Low/Medium/High)
Exchange rate
risk
(BDT/USD

Steps to manage or
mitigate this risk

Payments in USD will Company

not
cover invoiced all export
High

amount

resulting in

policy to hedge
orders takenin

USD currency

at

time of

rate changes)

losses or eroded profit order receipt

margin
Legal action could be Ensure up to date

Legal risk:

taken
product

against us

withadvice

legal

on liability laws in

High
subsequent

financial USA

and

take

out

liability laws
claims by customers

Non payment Medium

insurance

Credit
checkson
any
Debtors
difficult to customers
we
provide
credit
terms to,
check
chase
overseas,
debtors list before shipping
financial losses
any orders. First order to
be prepayment or L/C

Risk Management Matrix by creating a simple list of potential risks. A Risk Management Matrix
is not only a good way to identify the probability of risks occurring and the
consequences if they do, it will also help you to order the priority of issues that cannot be
ignored.
Grading risks helps you to focus on critical areas and to mitigate them before they become a
crisis. For example, if all of export business is with a single client in, and that company becomes
insolvent, the outcome could be catastrophic. But if the likelihood of insolvency is low, your risk
ranking for that event is more moderate, although it may still require monitoring. It is a good
idea to review your Risk Management Matrix regularly to ensure you cover any emerging market
changes.
OTHER RISK MANAGEMENT MEASURES
Building a Foreign Exchange Policy
This guide will help you develop a basic foreign exchange policy that protects your business
from volatile exchange rates that can put your cash flow, profitability and competitiveness at
risk.
Credit Management Processes that Pay Off

Strong credit management is essential to mitigating risk. This white paper offers information and
tools that can help you establish or enhance your companys credit management practices.
Currency Risk Management Practices of Canadian Firms
Most companies would accept lower profit margins to minimize risk. Thats just one of the
findings of our EDC Research Panel survey on risk managementavailable to you in this
informative report.
Financial Crime in International Trade
Protecting business from getting involved in financial crimeeven as an unwitting accomplice
is a must when doing business abroad. This guide can help your company identify and manage
the risks of financial crime in international trade.
Introduction to Exporting: How to Sell to International Markets
Not sure where to begin when it comes to exporting? This report can help you determine if your
company is ready for international trade and learn how to overcome barriers and risks.
Managing Foreign Exchange Risk
The value of the Canadian dollar can change quickly and dramatically. This paper offers an
introduction to the subject of foreign exchange risk and how to minimize the impact of a
changing currency on your international business.
Research and Development: A Key Input for Enhancing Canadian Export Capacity
Research and development can help you make better export decisions and expand your presence
in international markets. This paper explains how.
Risk and Cash Flow Management

This guide offers practical advice on addressing the challenges associated with international
trade, including complex operational risks, capital requirements and the need to manage cash
flow more vigilantly