INTERNATIONAL BUSINESS MODELS

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]