INTERNATIONAL
BUSINESS MODELS
Prospective international managers
must first realize there is no single way to enter a foreign market. Businesses
must choose the model appropriate to their level of resources, market
potential, and experience operating in the international sphere. The various
categories of international business models include export/import businesses,
independent agents, licensing and franchising agreements, direct investment in
established foreign companies, joint ventures, and multinational corporations
(MNC). The differences among these options are sometimes subtle in nature.
IMPORT/EXPORT
BUSINESSES.
For instance, an export firm is one
that sells its domestically made products to a very small number of countries.
In contrast, import firms import foreign-made goods into the country for
domestic use. Often, export and import firms are operated by a small group of
people who have close ties with the countries in which they do business. Some
such firms may begin as export or import specialists, but eventually expand their
operations to production of goods overseas. IBM and Coca-Cola Co. exemplify
companies that have used that approach.
INDEPENDENT
AGENTS, LICENSES, AND FRANCHISES.
Independent agents are
businesspeople who contract with foreign residents or businesses to represent
the exporting firm's product in another country. Closely related are firms with
licensing agreements, in which domestic firms grant foreign individuals or
companies the right to manufacture and/or market the ex-porter's product in
that country in return for royalties on sales. Another variation is a
franchising arrangement, in which the parent company grants a franchise upon
payment of a franchise fee by a local business operator, who then agrees to
follow a prescribed methodology and marketing plan using the company's name.
The local franchisee may have to pay royalties or annual franchise fees, but
otherwise remains independent of the franchisor. In each of these models,
assuming the partner in the target market is competent, the risks to the originating
company are usually low, as it is not setting up operations of its own in the
foreign country, but rather relying on independent businesses or individuals
that are already there.
JOINT
VENTURES.
Joint ventures help distribute the
risk of entering foreign markets and can provide hands-on experience for a
company just initiating its presence in a particular country. Joint ventures
can be formed with another domestic company to do business in another country,
e.g., two Japanese companies collaborate in a Chinese business venture, or
between one company from outside the target market and one from within, e.g., a
Mexican firm and a Vietnamese firm create a new venture to do business in
Vietnam. Having a local partner, as in the latter example, can be especially
beneficial to a company that is relatively unfamiliar with the market it is
trying to enter. This sort of arrangement can serve as a validation mechanism
to reduce the chance of making foolish mistakes by not knowing local customs,
preferences, laws, and so on.
BUYING
A STAKE IN A FOREIGN AFFILIATE.
Buying part or all of a foreign
company is a common form of foreign direct investment and carries with it the
advantages of having an experienced partner to help do business in the foreign
market. The foreign affiliate may be left to operate as a relatively
independent entity, functioning more like a partner, or it may be more tightly
integrated into the parent organization as a division or subsidiary.
MULTINATIONAL
CORPORATIONS.
Multinational firms are relatively
new in the business world, yet they are becoming increasingly important. There
is no specific definition of a MNC. Nor is it easy to differentiate an MNC from
a company that simply has offices or factories in multiple countries. Some experts
define an MNC as a company that derives at least 25 percent of its sales from
foreign sources. However, that is an arbitrary figure. Others define an MNC by
its size. There is general agreement that large, multibillion-dollar
enterprises, such as General Electric Company, Mitsubishi Corporation,
DaimlerChrysler AG, and so forth, constitute MNCs.
Experts predict that the numbers of
MNCs, joint ventures, and other international operations will rise as
businesses seek to take advantage of economies of scale and the growth of new
markets as a way of reducing costs and increasing profits. As the geo-graphic
boundaries over which individual companies operate become less defined, the
need for people who are able to manage international activities becomes more acute.
Thus, international managers are becoming more important in the business world,
and their success can directly affect a company seeking to compete in the
global market. As a result, business leaders are placing increased emphasis on
the development of managers with expertise in international management.
Foreign Market Entry Modes
The decision of how to enter
a foreign market can have a significant impact on the results. Expansion into
foreign markets can be achieved via the following four mechanisms:
- Exporting
- Licensing
- Joint Venture
- Direct Investment
Exporting
Exporting is the marketing
and direct sale of domestically-produced goods in another country. Exporting is
a traditional and well-established method of reaching foreign markets. Since exporting
does not require that the goods be produced in the target country, no
investment in foreign production facilities is required. Most of the costs
associated with exporting take the form of marketing expenses.
Exporting commonly requires
coordination among four players:
- Exporter
- Importer
- Transport provider
- Government
Licensing
Licensing essentially permits
a company in the target country to use the property of the licensor. Such
property usually is intangible, such as trademarks, patents, and production
techniques. The licensee pays a fee in exchange for the rights to use the
intangible property and possibly for technical assistance.
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.
Joint Venture
There are five common
objectives in a joint venture: market entry, risk/reward sharing, technology
sharing and joint product development, and conforming to government
regulations. Other benefits include political connections and distribution
channel access that may depend on relationships.
Such alliances often are
favorable when:
·
the
partners' strategic goals converge while their competitive goals diverge;
·
the
partners' size, market power, and resources are small compared to the industry
leaders; and
·
partners'
are able to learn from one another while limiting access to their own
proprietary skills.
The key issues to consider in
a joint venture are ownership, control, length of agreement, pricing,
technology transfer, local firm capabilities and resources, and government
intentions.
Potential problems include:
- conflict over asymmetric new
investments
- mistrust over proprietary
knowledge
- performance ambiguity - how to
split the pie
- lack of parent firm support
- cultural clashes
- if, how, and when to terminate
the relationship
Joint ventures have
conflicting pressures to cooperate and compete:
·
Strategic
imperative: the partners want to maximize the advantage gained for the joint
venture, but they also want to maximize their own competitive position.
·
The
joint venture attempts to develop shared resources, but each firm wants to
develop and protect its own proprietary resources.
·
The
joint venture is controlled through negotiations and coordination processes,
while each firm would like to have hierarchical control.
Foreign Direct Investment
Foreign direct investment
(FDI) is the direct ownership of facilities in the target country. It involves
the transfer of resources including capital, technology, and personnel. Direct
foreign investment may be made through the acquisition of an existing entity or
the establishment of a new enterprise.
Direct ownership provides a
high degree of control in the operations and the ability to better know the
consumers and competitive environment. However, it requires a high level of
resources and a high degree of commitment.
The Case of EuroDisney
Different modes of entry may
be more appropriate under different circumstances, and the mode of entry is an
important factor in the success of the project. Walt Disney Co. faced the
challenge of building a theme park in Europe. Disney's mode of entry in Japan
had been licensing. However, the firm chose direct investment in its European
theme park, owning 49% with the remaining 51% held publicly.
Besides the mode of entry,
another important element in Disney's decision was exactly where in Europe to
locate. There are many factors in the site selection decision, and a company
carefully must define and evaluate the criteria for choosing a location. The
problems with the EuroDisney project illustrate that even if a company has been
successful in the past, as Disney had been with its California, Florida, and
Tokyo theme parks, future success is not guaranteed, especially when moving
into a different country and culture. The appropriate adjustments for national
differences always should be made.
Comparision of Market Entry
Options
The following table provides
a summary of the possible modes of foreign market entry:
Comparison of Foreign Market Entry
Modes
Mode
|
Conditions
Favoring this Mode
|
Advantages
|
Disadvantages
|
Exporting
|
Limited
sales potential in target country; little product adaptation required
Distribution channels close to plants
High target country production costs
Liberal import policies
High political risk |
Minimizes
risk and investment.
Speed of entry
Maximizes scale; uses existing facilities. |
Trade
barriers & tariffs add to costs.
Transport costs
Limits access to local information
Company viewed as an outsider |
Licensing
|
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. |
Minimizes
risk and investment.
Speed of entry
Able to circumvent trade barriers
High ROI |
Lack of
control over use of assets.
Licensee may become competitor.
Knowledge spillovers
License period is limited |
Joint
Ventures
|
Import
barriers
Large cultural distance
Assets cannot be fairly priced
High sales potential
Some political risk
Government restrictions on foreign
ownership
Local company can provide skills,
resources, distribution network, brand name, etc. |
Overcomes
ownership restrictions and cultural distance
Combines resources of 2 companies.
Potential for learning
Viewed as insider
Less investment required |
Difficult
to manage
Dilution of control
Greater risk than exporting a &
licensing
Knowledge spillovers
Partner may become a competitor. |
Direct
Investment
|
Import
barriers
Small cultural distance
Assets cannot be fairly priced
High sales potential
Low political risk |
Greater
knowledge of local market
Can better apply specialized skills
Minimizes knowledge spillover
Can be viewed as an insider |
Higher
risk than other modes
Requires more resources and commitment
May be difficult to manage the local
resources. |
8. Global - Producing a product the same way for every
market that it is sold in. There are not any modifications made to the product
the exact product sold in China would not change if sold in Europe.
Multidomestic - It sees customers as being unique. A multidomestic company
modifies a product to accommodate the wants/needs of the market. Ex. A Coke
Cola Sold China has a different taste from those sold in the U.S.
In his book "concepts in Strategic Management and Business Policy"
for Wheelen, I find that such differences are considered to be minor
adjustments.
Products such as Insurance and Banking systems could be considered to be
Multidomestic.
5. In
computing,
internationalization and localization (also spelled
internationalisation
and localisation, see
spelling differences)
are means of adapting
computer software to different languages and
regional differences. Internationalization is the process of designing a software
application so that it can be adapted to various languages and regions without
engineering changes. Localization is the process of adapting internationalized
software for a specific region or language by adding
locale-specific
components and translating text.
The terms are frequently abbreviated to the
numeronyms i18n
(where 18 stands for the number of letters between the first
i and last
n
in
internationalization, a usage coined at
DEC in the 1970s or 80s
[1])
and
L10n respectively, due to the length of the words. The capital L in
L10n helps to distinguish it from the lowercase i in i18n.
Some companies, like
Microsoft,
IBM and
Sun Microsystems, use the term
"globalization" for the combination of internationalization and localization.
[2][3]
Globalization can also be abbreviated to g11n.
[4]
During the first hour: 
