Unit 8 Entry into the

International Markets

Objectives
After studying this unit you should be able to:
•• understand the complications of international trade;
•• understand the methods of entry into international trade;
•• identify a suitable international trade entering method for a firm based
on certain parameters suggested; and
•• discuss the role of government in establishing trade policy and
providing the environment that restrict and support international trade.
Structure
8.1 Introduction
8.2 Entry Strategies
8.3 Government Involvement in Trade Restrictions and Incentives
8.4 Summary
8.5 Key Words
8.6 Self-Assessment Questions
8.7 References/Further Readings

8.1 Introduction
A growing business wants to look for potential market and explore new
markets, locate supporting resources and supplies of raw materials and
labor, raise required capital, explore availability of skilled manpower and
hire personnel, develop a marketing plan, establish distribution channel and
identify retail outlets. Management must establish controls and feedback
systems as well as accounting, finance and personnel functions as an overlay
upon this comprehensive system.
Budding international business firm is not only contended with establishing
an international element to add to domestic operations but also understands
the fact that international business has a significant involvement of
environmental factors that differ from their own in all aspects- cultures,
economies, government policies and political systems.
Business enterprises need huge investments of time, energy and personnel
at domestic level and venturing into international boundaries intensifies the
number of steps essential at the firm’s length and breadth and its reach,
effort and activity. Each establishment in international business requires
international components and separate and discrete units. It is more likely
that domestic firm enters foreign market in a progressive way beginning
with exporting, which is less risky and needs less foreign investment.
Subsequently the firm once it gets confident with the business opportunities
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International Strategy in the foreign country slowly increase its investments with new and
extended forms of foreign investments viz., franchising, joint venture direct
investment etc. Prior to taking decisions on international business, the firm
must evaluate its resources like personnel, assets, experience in overseas
markets and the suitability and demand for the product in those markets. A
firm must also evaluate the level of control necessary to manage overseas
operations. These must be reviewed in the light of competition expected
in markets abroad and availability of business opportunities created by
international operations.

8.2 Entry Strategies

There are various entry strategies through which the firms can enter
international trade. These are:

1. Export Based Entry - Exporting is a very popular and beginners’

method of internationalization and international trade. It requires
low amount of a firm’s involvement in terms of the need of firm’s
allocation of resources to serve overseas market. In this method firm
uses its domestic market for production distribution and administration
and a portion of the produce is marketed abroad. In other words, the
producer produces the goods in home country and through various
modes of transport i.e. air, ship, rail, truck and pipelines laid across
the border, sells it to other countries. For initiating this method of
foreign trade, a firm looks for an opportunity for the products and
services abroad and decides to be either a direct or indirect exporter.

a) Direct Exporting - Means a producer or supplier directly sells

goods and services in an international market through a directly
managed channel (distributors, foreign retailers and other
intermediaries, sales representatives or directly selling to the
end user).

b) Indirect Exporting - Indirect exporting means selling of the

product to an intermediary usually a third party who in turn sells
either to customers or sells it’s to importing wholesalers. The
easiest and low risk and effort method of indirect exporting is
to sell products to an intermediary in the home country and that
intermediary specializes in exports thus takes the responsibility
of selling the produce in the foreign countries. This method
relieves the producer from the hassles of internationalization
especially payments and logistics.

The advantages and disadvantages of the exporting are highlighted in Table

8.1.

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Table 8.1: Advantages and Disadvantages of Exporting Entry into the International
Markets
Advantages Disadvantages
 Low risk as the allocation  Per Unit cost of exporting
of resources and factors of may be high as a result of
production are not allocated to lack of understanding of the
the foreign country. costs of fees commissions,
 Increases sales and reduce export duties, taxes and
inventories. transportation.
 Exporter is not involved in the  May lead to less than optimal
foreign operating environment market penetration because
factors pertaining to the foreign of inappropriate packaging or
country. promotion.
 Exporting provides easy way  Exported good may lack
to identify market potential specific overseas market
and establish brand name in the requirement.
foreign country.  Difficulty in keeping track
 Provides easy access to exit and of changes in the business
stop exporting if the product environment factors.
has low demand in the foreign  Firm may have problem
country and the venture is maintaining market share and
unprofitable with low loss in contacts because of distance.
capital investment.  Possibility of loss of market
share if the local firm copies
the products or services
offered by the exporter.
 The exporting firm might face
restrictions against its products
from the host country.
The problems or disadvantages can be addressed by
i) Establishing direct exporting capability by establishing a sales firm
within the foreign market to handle the technical aspects of export
trading and keep abreast of market developments, demand and
competition.
ii) Firms may choose to expand their operations in foreign countries to
include other forms of investments.
2. Non-Equity Based Entry
Licensing- licensing is a method of internationalizing through which
a firm (licensee) gets from the licensor some type of intangible
rights which could be rights to a process, patent, program, trademark,
copyright or expertise.
The advantages and disadvantages of licensing are discussed in Table
8.2.

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International Strategy Table 8.2: Advantages and Disadvantages of Licensing
Advantages Disadvantages
 Licensor receives profits in  Might limit future profit
addition to the profits generated opportunities associated with
from operations in domestic the property by tying up its
markets. rights for an extended period.
 These profits may be additional  The firm might lose control over
revenues from a single process the quality of its products and
used at the home country but not processes or use or misuse of
effectively utilized in a foreign the assets and protection of the
country. reputation of the licensor firm.
 Can provide additional profits  Agreement between licensor
than those generated from the and the licensee should be clear
operations in the domestic in terms of appropriate use of
markets which may be additional processes method or name of the
revenues from single process or licensor as the allowable market
method. and re-export parameters for the
 This process benefits by licensee. The contract should
providing an extended life cycle also stipulate contingencies and
to the firm’s product which recourse should the licensor or
sometimes gets saturated in the licensee fail to comply with its
home country. terms.

Franchising - Franchising is similar to licensing but in franchising other

than granting permission to use the name, trademark and process of the
franchisor the franchisee also gets assistance with the operations or supply
of raw materials from the franchisor. In this agreement between franchisor
and the franchisee there is a larger degree of control when compared to
licensing agreements. The franchisee pays an initial fee and a proportion
of share of profit to the franchising firm. This method works on the mutual
understanding of profit sharing between the franchisee and franchisor.
The Advantages and Disadvantages of Franchising are:
Advantages Disadvantages
Increased revenues and expansion Assuring quality and operating
of its brand, name, identification standards might be difficult and
and market reach. result in loss or brand image.

The franchising contract should be carefully designed and provide recourse

for the franchising firm clearly indicating the legal course of action if the
franchisee does not comply with the terms and conditions of the agreement.
Contract Manufacturing
Contract manufacturing is also one of the methods firms use to enter into a
foreign country. As part of this contract MNC firms enter into contracts with
local firms to provide manufacturing services. This arrangement is akin to
vertical integration with the firms. MNCs subcontract the production instead
of establishing its own production locations. MNC sometimes enters into a
full production contract with the local plant which produces goods to be
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sold under the name of the original manufacturer and another method of Entry into the International
entering into such contracts is by providing partial manufacturing services Markets
for example, assembly work or production of spare parts.
Table 8.3: Advantages and Disadvantages of Contract Manufacturing
Advantages Disadvantages
Expanding the supply or production The firm entering into contract may
expertise of the contracting firm at also forgo some degree of control
minimum cost. over the production and supply
timetable when it contracts with
a local firm to provide specific
services.
MNCs can enter into vertical
diversification without a full-scale
commitment of resources and
personnel.
Management Contracts
Management contracts are methods in which firm agrees to rent its expertise
or know-how to government or firm in the form of personnel who enter
the foreign environment and run the concern. This method of involvement
in foreign markets is used with a new business facility after expropriation
of a concern by a national government or when an operation is in trouble.
Management contracts are frequently used in concern with turnkey
operations. Under these agreements firms provide services of overseeing all
details in the startup facilities including design construction and operation.
These projects are large scale projects for instance, production plants or
utility constructions. The problems faced by the turnkey contracts is often
the time period or duration of the contract yielding long pay out schedules
and carries greater risk of foreign exchange fluctuation.
Direct Investment
Direct investment means a firm investing directly through real commitment
of resources viz., capital and personnel and assets in the foreign land
beyond domestic borders. This investment provides greater control of costs
and operations and improves profitability. The only factor of risk in such
investment is the business environment factors prevailing in the foreign
land. Direct investment as an international activity runs a continuum from
joint ventures to wholly owned subsidiary. These methods are high in terms
of rewards and also high in terms of risks involved.
Multinational firms prefer to make direct investment because of the
following reasons:
a) To gain access to enlarged market.
b) To take advantage of cost differentials arising from cheaper sources
of factors of production i.e., land, labour and capital available in the
foreign market. These reasons help in increasing the profitability of
the firm.
c) To counter strategic moves of the competitors or to follow a market
leader in new markets.
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International Strategy Strategic Alliances or Joint Ventures
Joint ventures are also strategic alliances in which two or more firms or
entities join together to establish some sort of business operation. Strategic
alliances may be formed by two partners. It can be between two MNCs,
one MNC and a local business person or MNC and government. If there
are two or more participants in the deal the relationship can also be called
as consortium operation. Parties in the joint venture contribute equity,
capital or assets. Percentage of ownership depends on the contribution
of the capital. Some countries stipulate the relative amount of ownership
allowable to foreign firms in joint ventures.
Table 8.4: Advantages and Disadvantages of Strategic Alliance
Advantages Disadvantages

 Opportunity to increase  Limits on profit repatriation to

growth and access to new the parent firm as it is sometimes
markets while avoiding restricted by the host countries.
excessive tariffs and taxes
associated with importing
products.

 Joining forces with local  Successful joint venture

businesses often neutralizes operations are becoming an
local existing and potential inviting target for nationalization.
competition and protects
the firm against business
environmental risks.

 Easier to raise capital.  MNC may have the capability

of achieving profitability and
growth in shorter time frame
than the local partner who
might be more concerned about
long profitability and providing
employment opportunities.

 Host government sometimes  There might be mismatch of

provides tax benefits to business objectives between
encourage foreign firm’s joint the two firms entering into joint
ventures. venture.

 Risks shared by partners, thus  Lack of complete control

joint ventures are relatively on the operations remains a
low risk operations. predominant problem.

A complete control over operations, decision making and profits can only be
established by wholly owned subsidiary on the foreign soil.
Wholly Owned Subsidiaries
A firm retains total control of its marketing, pricing, production, decisions
and can maintain greater security over its technological assets by establishing
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its own foreign arm. Firm is also entitled for cent percent profits generated Entry into the International
by the enterprise but also bears all the risks involved in the business like Markets
expropriation limits on profits being repatriated and locally operating
government polices rules and regulation. In establishing and entering into
a new international market the firm can choose one of the routes explained
below.
i) Acquiring an ongoing operation.
ii) Start a completely new firm from the scratch (Green field strategy)
-This method can be used if no suitable facilities are found to be
acquired or if the firm has special requirements of facilities.
iii) Buying a new firm known (Brownfield strategy) having the advantage
of avoiding startup costs of capital and time lag and is often faster
and easier to at local levels and is cheaper than building a new firm
from the scratch. Buying also has the advantages or not adding to
a country’s existing capacity and improving goodwill with the host
country nationals.
Globalized Operations
Consumers around the world are increasingly similar in their goals and
requirements of product attributes and products resulting in the world
moving towards a global market with standardized products across
countries and all cultures. Increasing demand for the products results in
low cost of manufacture as an outcome of economies of scale. Such firms
are characterized by globalized operations as distinct from multinationals,
firms with globalized operations are capable of taking business opportunities
across the world and constrained to specific sectors for example, PepsiCo,
Coca Cola, and Levis Strauss etc. ranging from consumer goods to fast
food.
Portfolio Investments
Portfolio Investments do not need the physical presence of a firm’s personnel
or products in a foreign country. These investments can be in the form of
securities, Notes, bonds, Commercial paper, and non-controlling stock
certificates of deposits or investments through foreign bank accounts or
lending through foreign bank loans. Investors invest in foreign economies
to achieve higher rates of return, avoid political risks in the home country
or speculate in the foreign exchange market.
Consortia, Keiretsu and Chaebol
Consortia is a business strategy to create a sizeable interlocking relationship
between firms in an industry. This strategy enhances the competitive
advantage of the firms in understanding.
Keiretsu is a coalition of many firms controlled by a dominant central
firm aimed at minimizing the competitive risk through cost sharing and
economies of scale.
Chaebol is largely applicable to Korean consortia financed by government
in order to gain competitive and strategic benefits.

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International Strategy Activity 1
1. Briefly describe licensing and its advantages and disadvantages.
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2. Explain franchising with examples.
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8.3 GOVERNMENT INVOLVEMENT IN TRADE

RESTRICTIONS AND INCENTIVES
Governments in most of the countries do restrict or support international
trade or transfer of resources to foreign countries. Intervention of this kind
may take the form of controlling the flow of trade and transfer of goods and
also there may be a control on the transfer of capital flows or controlling the
movement of personnel and technology. Rationale for intervention may vary
from country to country and government to government and fall into several
patterns. Government is motivated by economic situation and interests
of the people such as revenue, currency rates, economic and monetary
considerations along with geographic and demographic competency levels
of the country are the major factors which contribute to policies of various
countries on foreign trade. Specific concerns in the country like health and
safety considerations or full employment objectives also play an important
role in the foreign trade Policy. The list of interventions is given below.
Protectionism –Refers to government intervention in order to protect some
specific industries in the economy. But protectionism need to be interpreted as
protecting inefficient and incompetent industries which are not competitive
in foreign market, instead the industry should make structural changes to
enhance its efficiency. Rationale for this intervention is-
a) Protect industry to ensure full employment opportunity imports and
relying more on domestic production which results in creation of jobs.
b) Protect infant industry pertinent in underdeveloped and less developed
economies. And justifying this protection stating that infant industries
cannot compete with established large industry thus they need some
protection.
c) Protecting specific industries is a part of the government’s industrial
policy decision in order to promote specific sectors in the economy for
diversifying the economic structure. Protection is usually given to the
sectors which are beneficial for the economy, earn foreign exchange
146 and yield higher marginal returns.
d) Rationale of protectionism is more based on emotional arguments Entry into the International
than economic. Markets

Protectionism leads to higher prices for consumer for imported products and
components and may lead to retaliation by importing countries and affect
the exports of the country. It may result in increased opportunity costs by
allocating the resources of a country inappropriately at the expense of other
sectors.
Method of Government Intervention
a) Application of tariffs to exports or imports.
d) Application of Non-tariff Barriers.
1. Tariffs -Tariffs or duties are a basic method of governmental
intervention in trade used to protect industries by increasing the
price of imports in order to make imported products costlier than
the domestic products. Tariffs may be placed on exports as well as
imports in the form of duties and are most typical control mechanism
on international trade.
Tariffs are assessed in three different ways.
•• Ad valorem duties- Levied as percentage on the value of goods.
•• Specific Duties - Assessed on the physical unit of measurement
for example, duties imposed per ton metric or any such fixed
unit.
•• Compound Tariff - Is a combination of Ad valorem and
specific duties.
2. Non-Tariff Barriers- Non- tariff barriers are a matter of concern
and controversial topic in trade activity over the past decade because
they are not traditional method of discouraging imports through the
application of duties. They work towards reducing the pace of flow
of goods into a country by enhancing physical and administration
difficulties. Non trade barriers take number of forms that provide
effective trade restraints.
 Discrimination by government against foreign suppliers in
bidding procedures.
 Rigorous customs and country entry procedures.
 Excessive and severe laid down standard inspection procedures.
 Elaborate safety specifications and domestic testing
requirements.
 Laid down required percentages of domestic material content.
Some countries tend to restrict and regulate products which they feel is
harmful to the citizens of the country for example, Canada has a strict
entry restriction for tobacco products on to the country. India’s policy does
not easily permit Alcohol manufacturing and high import duties on some
specific luxury goods like automobiles.

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International Strategy Quotas
Countries impose quotas to restrict quality volume or value-based imports.
These quotas may be unilateral according to the commodity and a stipulated
amount of aggregate import is permitted from any source or country.
Alternatively the government of a country may decide and be selective on
regional basis.
A type of quota is an embargo which prohibits all types of trade between
countries and voluntary entry restriction is another type encountered in
recent trade history in which countries agree to restrict their exports to a
country, but are forced into compliance through the use of direct or subtle
political pressure from major trading partners. Imposition of quotas is to
restrict inflow of certain commodities into the country which often leads to
higher import prices.
Activity 2
1. Briefly explain methods of government intervention in foreign trade.
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2. How does government involvement affect trade?
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8.4 SUMMARY
Basic functional and operational activities in international business are
same as domestic business. The difference is across boundaries operations
encounters different economies, cultures, legal systems, governments and
languages which must be integrated into business policies and practices.
Entry and expansion of a firm may necessitate entry into international trade.
Entry into international business varies among continuum ranging from basic
entry levels like exporting to the rest like licensing, franchising, contract
manufacturing, direct investment, joint ventures, wholly owned subsidiaries,
globalized operations, and portfolio investments in a continuum. Some
countries have low risk and give lots of support to international enterprisers
and others have dismal interest and policy support. Governments in the
host country play a crucial role in deciding either to restrict or support
international business. Often international business policy of a government
is in alignment with monetary and economic goal along with maintenance
of national security, improve health, safety and employment level or support
specific political objectives. Protectionism, tariffs non-tariff barriers and
government interventions are the methods of restricting international trade.
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 Entry into the International
8.5 KEY WORDS Markets
International Business: A cross boarder transaction between individuals,
business or boarder entities for anything such as goods, services, technology,
knowledge, etc.
Licensing: A licensor (i.e. the firm with the technology or brand) can
provide their products, services, brand and/or technology to a licensee
via an agreement. This agreement will describe the terms of the strategic
alliance, allowing the licensor affordable and low risk entry to a foreign
market while the licensee can gain access to the competitive advantages and
unique assets of another firm.
Franchising: Parent firm gives right to other firms to carry on business in
its name.
Outsourcing and Off-shoring: Giving contracts to international firms for
certain business purpose.
Multinational Firms (MNCs): The firms that are conducting business in
more than one country.
Foreign Direct Investment (FDI): Investment made by an individual or
a firm located in one country to the business interest located in another
foreign country.
Investing directly into production in a country by a firm located in another
country either by buying a firm in the target country or by expanding
operations of an existing business in that country.
Franchisee: A holder of a franchise, a person who is granted a franchise.
Franchisor: A firm or person who grants franchises.
Franchising: is a business set up in which an organization (The franchiser)
has the option to grant entrepreneurial rights to a local firm (Franchisee) to
access its brand, trademarks and products for value.
Barter: Exchange of goods and services without involving currency.
Counter Purchase: Sale of goods and services to one firm in another country
by a firm that promises to make future purchase of a specific product from
the same firm in that country.
Switch Trading: Practice in which one firm sells to another firm to fulfill
the obligation made to make purchase in a given country.
Joint Venture: A cooperative partnership between two individuals or
businesses in which profits and risks are shared.
Contract Manufacturing: Is a business model in which firm hires a
contract manufacture to produce components or final products based on the
hiring firms design.
Exporting: The sale of capital goods and services across international
borders or territories or in other words, act of selling to a foreign country.
Brownfield Strategy: The entering of a foreign market via the purchase of
an existing firm.
Foreign Exchange: Transactions involving the exchange of one currency
for another.
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International Strategy
8.6 SELF- Assessment Questions
1. Explain the suitability of a corporation to go international through
joint venture approach rather than a wholly subsidiary approach.
Give a suitable example.
2. How can foreign direct investment benefit or cause harm to an
economy receiving it. Discuss.
3. Discuss the methods used by the governments to protect their domestic
business environment.
4. Describe various factors considered by a firm to conduct business
internationally.
5. Prescribe suitable method for going international with proper
justification for the following sectors.
a) An automobile manufacturer
b) A software developer
c) An oil exploration-production firm
d) An electrical power plant builder
e) A farmer with a large surplus of wheat
f) A restaurant operator with a new barbecued ribs recipe.

8.7 References/ Further Readings

1. Parvez N Ghauri and Jean Chaude Usunier, International Business
and management ELSEVIER Ltd The Boulevard, Langford Lane
Kidlington, Oxford OX5 1GB, UK.
2. Riad Ajami etal. International Business theory and Practice, ME
Sharpe Armonk, Newyork
Weblinks
https://yourbusiness.azcentral.com/political-financial-economic-
risks-international-business-17322.html
https://www.coursehero.com/file/p1juctu/Consortia-Keiretsus-and-
Chaebols-Consortia-is-a-strategy-to-create-a-sizeable/

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