MODES OF ENTRY

EXPORTING
LICENSING
FRANCHISING
SPECIAL MODES-: Contract manufacturing,

Business process outsourcing

Management contracts
Turnkey projects
FDI WITHOUT ALLIANCES-: Green field strategy
FDI WITH ALLIANCES-: Mergers & Acquisitions
Joint Ventures

EXPORTING
Need limited finance
Less risk
Motivation for exporting:-

Reactive motivators- Co. get motivated if there is

decline in the demand for its product in home
country then they start exporting the product
proactive motivators- Grabbing the opportunities
available in the host country.

Exporting contd.
Factors to be considered:a) Govt. policies like export policies, import policies,

export financing, foreign exchange etc.

b) Marketing factors like image, distribution channels,
responsiveness to the customer, customer awareness
& customer preferences.
c) Logistical consideration include physical distribution
cost, warehousing cost, packaging, transporting, etc.
d) Distribution issues includes own distribution
network, networks of host countrys co.

LICENSING (INTERNATIONAL)
In this mode of entry, the domestic manufacturer

leases the right to use its intellectual property i.e.,

technology, work methods, patents(invention),
copyrights(authors, composer etc.), brand names,
trademarks(symbol, word or design) etc. to a
manufacturer in a foreign country for a fee.
Domestic country licensor
Foreign country licensee

LICENSING PROCESS
LICENSOR

LISENSOR

LEASES THE RIGHT TO USE THE

INTELLECTUAL PROPERTY

RECEIVES ROYALTY MONEY

USE INTELLECTUAL PROPERTY TO

PRODUCE PRODUTS FOR SALE IN
HIS COUNTRY

PAYS ROYALTY TO THE LICENSOR

FOR USING INTELLECTUAL
PROPERTY

LICENSEE

LICENSEE

Basic issues in International licensing

a) Boundaries of the agreement:-

company should clearly defined the boundaries of agreements.

They determine which rights & privileges are being conveyed in
the agreements.
Ex. Pepsi-cola granted license to Heineken of Netherlands with
exclusive rights of producing & selling Pepsi-cola in
Netherlands. Under this agreement the boundaries are:
(i) Heineken should not export Pepsi-cola to any other country.
(ii) Pepsi supplies concentrated cola syrup & Heineken adds
carbonated water to produce beverage &
(iii) Pepsi can grant license to other co. in Netherlands to produce
other products of Pepsi.

b) Determination of Royalty:both parties negotiate for a fair royalty for both

the sides in order to implement the contract more
successfully.
c) Determining Rights, privileges & constraints:it should be clear & specific in order to reduce the
hurdles in the implementation of the agreement.
d) Dispute settlement mechanism
e) Agreement duration

FRANCHISING (INETRNATIONAL)
It is a form of licensing. The franchisor can exercise more

control over the franchised compared to that in licensing.

Under this, an independent orgn called Franchisee
operates the business under the name of another company
called the Franchisor. The franchisor provides the
following services to the franchisee:Trademarks
Operating systems
Product reputations
Continuous support system like advertising, employee
training, quality assurance programmes etc.

Basic Issues in Franchising:The franchisor has been successful in his home country.
The franchisor may have the experience in franchising in
home country before going for international franchising.
Franchising Agreements:It has to pay a fixed amount and royalty based on the sales to
the franchisor.
Franchisee should agree to adhere to follow the franchisors
requirement like appearance, financial reporting, operating
procedures, customer service etc.
Franchisor helps the franchisee in establishing the
manufacturing facilities, service facilities, provides expertise,
advertising, corporate image etc.

Agreements contd
Franchisor allows the franchisee some degree of

flexibility in order to meet the local taste &

preferences.
Ex. McD restaurants in Germany sell beer also & in
France wine.

SPECIAL MODES
I. CONTRACT MANUFACTURING

Some company outsource their part of or entire

production and concentrate on marketing
operations. This practice is called the contract
manufacturing/outsourcing.
Ex. Nike has contracted with a no. of factories in
south-east Asia to produce its athletic foot ware & it
concentrates on marketing only.

SPECIAL MODES

II. BUSINESS PROCESS OUTSOURCING (BPO)

SPECIAL MODES
III. MANAGEMENT CONTRACTS

The company with low level technology & managerial

expertise may seek the assistance of a foreign co.
Then the foreign co. may agree to provide technical
assistance & managerial expertise. This agreement
between two companies is called the MGMT contracts.
A mgmt contract is an agreement between two co.,
whereby one co. provides managerial assistance,
technical expertise & specialized services to the second
co. of the agreement for a certain period of time in
return for monetary compensation.

SPECIAL MODES
IV. TURNKEY PROJECTS

Approach of T-project is B-O-T (Build, Operate &

Transfer)
The company builds the manufacturing/service
facility, operates it for some time and then transfers
it to the host countrys govt.
The co. normally approach the host countrys govt. or
International Finance corp., EXIM bank etc. for
financial assistance as the T-projects require huge
finances.

FDI WITHOUT ALLIANCES

Co. which enter the international market through

FDI invest their, establish mfg. & marketing facilities

through ownership & control.
GREENFIELD STRATEGY
G.F. strategy is starting of the operations of a co. from
scratch in foreign market. The co. conducts the mkt
survey, selects the location, buys/lease land, creates
the new facilities, erects the machinery, transfers the
HR & starts the operations & mkg activities.

FDI WITH ALLIANCES

MERGERS

A merger refers to a combination of 2 or more companies into a single

company.
Merger is said to occur when 2 or more co. combine into one. It is defined
as transaction involving 2 or more Companies in the exchange of
securities and only one co. survives.
When the shareholder of more than one company, usually two, decides to
pool the resources of the companies under a common entity, it is called
merger.
If as a result of merger, a new company comes into existence it is called
amalgamation
and
If one company survives and other lose their independent entity, it is called
absorption.

Ex. Coca-cola entered Indian market instantly by

acquiring the Parle & its bottling units.

Toronto Dominion Bank & Canada Trust Bank
merged & have become TD Canada Trust.
Ex. Hindustan Computers Ltd. (HCL) and HewlettPackard (HP)of USA formed HCL-HP.
Sony-Ericsson - the Japanese consumer electronics co.
Sony corp. & the Swedish telecommunications
company Ericsson merged to make mobile phones.

Takeover/acquisition
A takeover generally involves the acquisition of a certain

block of equity capital of a co. which enables the acquirer

to exercise control over the affairs of the co.
The main objective of takeover bid is to obtain legal
control of the co.
Take over may be defined as a transaction or series of
transactions whereby an individual or group of
individuals.
It is an acquisition of shares carrying voting rights in a
co. with a view to gaining control over the assets and
management of the co.

Takeover vs merger
Takeover
co. taken over maintains

its separate entity.

Merger
Both the co. merge to

form single corporate

entity & at least one co.
loses its identity.

Takeover vs acquisition
Takeover
if the willingness is

absent.

Acquisition
If there exists willingness

of the co. being acquired.

Kinds of takeover
Friendly takeover: - in this, the acquirer will purchase

the controlling shares after through negotiations &

agreement with the seller. It is for mutual advantage of
acquirer & acquired co.
Hostile takeover: - a person seeking control over a co.,
purchases the required number of shares from noncontrolling shareholders in the open market. This turnover
is against the wishes to the target co. management.
Bailout Takeover: - these forms of takeover are resorted
to bailout the sick co. to allow the co. for rehabilitation as
per the schemes approved by the financial institutions.

JOINT VENTURE

It is a form of business combination in which 2

unaffiliated (not associated with each other) business
firms contribute financial and/or physical assets as
well as personnel , to a new co. formed to engage in
some economic activity such as production or
marketing of a product.
- A J.V by a domestic co. with MNC can allow the
transfer of technology & reaching to global market.
Entering into JV is a part of strategic business policy
to diversify & enter into new market, acquire finance,
technology, patent & brand names. \
- Most joint ventures are 50:50 partnerships

Joint Ventures
Joint ventures are attractive because:
they allow the firm to benefit from a local partner's knowledge of the
host country's competitive conditions, culture, language, political
systems, and business systems
the costs and risks of opening a foreign market are shared with the
partner
When political considerations make joint ventures the only feasible
entry mode
Joint ventures are unattractive because:
the firm risks giving control of its technology to its partner
the firm may not have the tight control over subsidiaries need to realize

experience curve or location economies

shared ownership can lead to conflicts and battles for control if goals
and objectives differ or change over time

Wholly Owned Subsidiaries

In a wholly owned subsidiary, the firm owns 100

percent of the stock

Firms can establish a wholly owned subsidiary in a
foreign market:
setting up a new operation in the host country
acquiring an established firm in the host country

Wholly Owned Subsidiaries

Wholly owned subsidiaries are attractive because:
they reduce the risk of losing control over core
competencies
they give a firm the tight control over operations in
different countries that is necessary for engaging in global
strategic coordination
they may be required in order to realize location and
experience curve economies
Wholly owned subsidiaries are unattractive because:
the firm bears the full cost and risk of setting up overseas
operations

Strategic Alliances
Strategic alliances refer to cooperative agreements

between potential or actual competitors

Strategic alliances range from formal joint ventures
to short-term contractual agreements
The number of strategic alliances has exploded in
recent decades

The Advantages Of Strategic Alliances

Strategic alliances:
facilitate entry into a foreign market
allow firms to share the fixed costs (and associated
risks) of developing new products or processes
bring together complementary skills and assets that
neither partner could easily develop on its own
can help a firm establish technological standards for
the industry that will benefit the firm

The Disadvantages Of Strategic Alliances

Strategic alliances can give competitors low-cost

routes to new technology and markets, but unless a

firm is careful, it can give away more than it receives

Making Alliances Work

The success of an alliance is a function of:
partner selection
alliance structure
the manner in which the alliance is managed

Making Alliances Work

A good partner:
helps the firm achieve its strategic goals and has the
capabilities the firm lacks and that it values
shares the firms vision for the purpose of the
alliance
is unlikely to try to opportunistically exploit the
alliance for its own ends: that it, to expropriate the
firms technological know-how while giving away
little in return

Making Alliances Work

Once a partner has been selected, the alliance should be
structured:
to make it difficult to transfer technology not meant to be
transferred
with contractual safeguards written into the alliance
agreement to guard against the risk of opportunism by a
partner
to allow for skills and technology swaps with equitable
gains
to minimize the risk of opportunism by an alliance
partner

Making Alliances Work

After selecting the partner and structuring the

alliance, the alliance must be managed

Successfully managing an alliance requires managers
from both companies to build interpersonal
relationships
A major determinant of how much a company gains
from an alliance is its ability to learn from its alliance
partners