Chapter-3

Modes of International Business

The Mode of Entry to International Market:
There are some modes of entries in international market. Specific conditions have
to follow in the case of specific method. An organization can realize about the
opportunities and threats of international market by forecasting these methods. For
the success of these methods, organization needs international experience and
investment. In the first stage, an organization can enter into international market
by exporting goods and services.
Importing
Importing products into countries is often dependent on what product, commodity,
or service is being imported. In the United States the Harmonized Tariff Schedule
is the directory for determining what if any tariff is imposed on the product in
question. Importing into any country should involve communicating with that
country's customs agency to determine the necessary licensing and logistics issues.
Often a customs broker is necessary to facilitate the smooth transfer of goods and
services between countries. Inherently, importing involves exporting from one
country; thus many of the issues involved in exporting are relevant and necessary
for importing goods and services.

Exporting
It is the first mode for an organization to enter into international market. Because
the rules and regulations of exporting is too easy. In this method, there is no need
to sign in an agreement between two countries. By paying the fixed tax to the
government, one can export goods and services.

Methods of Exporting
Direct Exporting
The typical exporting system is a company-owned export department, in which a
manufacturer sells directly to companies or consumers in foreign countries. In this
arrangement, the company has complete control over the marketing and

distribution of its goods and services, distribution, sales, pricing, and other
business choices. Bartering is another method that manufacturers may use to sell
their goods abroad. The merchants usually offer complementary services to their
buyers such as maintenance, parts sales, and technical support. A direct merchant
often has a close relationship with the exporter, giving the merchant exclusive
rights to sell and service the goods.
Indirect Exporting
When a company uses a home-based merchant or agent to find and deliver goods
to foreign buyers it utilizes indirect exporting. This method of exporting poses the
least amount of risk and expense because it is relatively easy to start up and has a
moderate up-front capital investment. Indirect agents act as intermediaries
between the exporter and buyer and facilitate the flow of goods.

Exporting Guidelines
The international market is more than four times larger than the U.S. market. The
growth rates in foreign countries are also much greater than domestic market
growth. By exporting, companies can keep ahead of competition. Before
implementing exporting, a company should measure the benefits against the costs
and risks associated with it. The following are ten keys to keep in mind when
exporting.
1. Obtain export counseling and create an international marketing plan before
beginning to export. The plan should include goals, objectives, and
expected problems.
2. Receive commitment from top management to correct initial problems and
to meet financial requirements. Take a long-range view of exporting.
3. Carefully select foreign distributors. International distributors should act
more independently than domestic ones, due to communication and
transportation difficulties.
4. Establish a foundation for a profitable operation and growth.
5. Continue dedication to export effort even when U.S. market is booming.
Many companies ignore their exporting plan when the U.S. economy picks
up and subsequently fail.
6. Foreign distributors should be treated like domestic counterparts. Many
companies implement advertising campaigns, discount offers, sales
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incentive programs, and so on to the U.S. market but don't make similar
offers to their international distributors.
7. Do not assume that a marketing technique that works in one market will
automatically work in others. Each market has to be treated separately to
ensure success.
8. Be willing to make modifications to products to meet foreign regulations in
other countries. Companies must take into account cultural preferences in
other countries.
9. Messages pertaining to sale and warranties should be printed in languages
locally understood. A company's foreign distributor may speak English, but
it is unlikely that all sales and service personnel have this capability.
10. Readily available servicing for products should be provided. A company
can earn a bad reputation when service support is not provided.

Advantages of Exporting
The advantages of exporting are described below
1. One can know the methods and opportunities of entering into
international market.
2. One can reduce the organizations risk by entering into international
market.
3. One can increase the productivity of the organization.
4. When the sales volume of an organization increase, the profit of that
organization increase simultaneously.
5. The efficiency of the mangers increase by entering in to international
market, employees are motivated too. As a result, organization can
achieve its objectives easily.
6. Company can achieve opportunities in international business and
market.
7. For exporting business, the number of customers of the company
increase day by day. It helps in reducing the business risk.
8. As the productivity of the company increase, it becomes able to achieve
the economic success and stability.
9. In the exporting business there is no need too much capital at the first
time.

Disadvantages of Exporting
In the exporting business there are some disadvantages too. These disadvantages
are mentioned below1. Price may become a big factor in the exporting of goods to any country.
2. Every one must follow the rules and regulations of international business.
For this reason, sometimes it is impossible to earn expected profit.
3. Every one bound to pay tax to home and host country. As a result,
sometimes it any occur loss in stead of profit.
4. In exporting the transportation fee may be too high which effects very
much in profit.
Factors of Exporting
The factors which can affect or influence the exporting activates can be divided
into two categories; internal factors and external factors. External factors are
related to the competitive mater of the company. Internal factors mean the
efficiency, effectiveness and the behavior of the employees of the company about
the exporting activities. Internal and external both affect in the exporting
decisions.
1. External factors: Some external factors affect to a companys exporting
business which are as follows:
Internal economical arrangement or weak economical structure.
Too much company related competitiveness.
In the case of tax rebate or if the government helps in other ways, them a
company becomes interested to export its goods and services.
On the other hand, some external factors make a company uninterested to export
goods. These factors are The presence of hindrances in international market such as quota, tariff etc.
Too much competition in the expected market.
Little demand in the expected market which competes internationally.
Accidentally, sometimes company acquires some ideas that affect negatively of the
exporting business. These types of ideas are-

 The concept is that the capital which is working in international market is

bigger than the achievement form this capital.
It is seemed that exporting related activates are too expensive.
Here the concept is that company will face a great problem afterwards, it is
continues it exporting operation.
Too little profit in the expected market.
2. Internal factors: Some internal factors also affect very much in the exporting
decisions. Some of the factors are managerial belief, rules, principles, behavior
etc. The managerial knowledge which affects n the exporting decisions are
mentioned below The exporting business can play a role in the development of the company
and in he increment of the profit.
The capital and the costs of exporting business can be balked by the
opportunities of this business.
Foreign business is more profitable than the internal business.
Mangers may believe that, there is a special product of the company.
Licensing
Licensing is an agreement where the license gets the right to produce
independently by paying a specific amount of money. Generally, by this agreement
a licensor get the royalty fee by giving the rights or license. An organization takes
necessary steps to produce product after getting the license. In this case, company
transfers its fictions assets by getting a specific amount of fee to a foreign
company. Such as trade mark, patent etc. There are so much industry where
licensing used widely.
Advantages of Licensing
There are some advantages of licensing. The advantages are described below1. There is no need to bear the newly establishment expenses of a company
for an organization.
2. Get the rights to use the other companys market and goodwill.
3. Get the rights to use the modern technology and strategy of the licensor
company.

4. Licensing helps the company to remove the commercial barriers by a low

cost or by a little investment.
5. Licensing also helps in avoiding the limitations of investment which are
imposed by the government of other country.
6. It influences the company to use its technology in the local market and also
motivate to use this technology to the reign countries.
Disadvantages of Licensing
There are some disadvantages too. The disadvantages of licensing are mentioned
below1. The meaning of licensing in not that a company gets the opportunity to
export product directly. It only gets the right to produce goods and services.
In the case of exporting it must follow the rules regulations of international
business.
2. The companies have to make a big expense to attract the foreign customers.
3. The rights of using the developed technology and equipment, which are get
by the licensing, to operate these company needs skilled and professional
employee. And it is too expensive.
4. The profit which is gained form the licensing may not be similar to other
methods of antenatal business.
5. On the other hand, licensing makes on existing company more competitive
and may create new competitors. For example, it can be mentioned he name
of American companies. By getting introduced with the American
technology by licensing, Japanese companies are marketing the substitute
products and services of the American companies.
Franchising
The first popular method of entering into foreign business is franchising. In this
method, one company gives the right to conduct business with other company by
maintaining rules and reputations. The cold drinks and fast food companies are
interested with franchising for expanding their business internationally.
Generally it is seemed that there is no difference between franchising and in
licensing. Franchising is for long term. Franchising means that types of licensing
however one company gives the rights to use that type of assets which are not
transferable to other company such as trade mare. But franchisee should follow the
franchisors rules and conditions strictly. Here the similarities are both the
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franchise and the license pay the royalty fee. One franchisee may face some
problems with the advantages just like a licensing. Though franchising is so much
popular, it has some problems. Such as Too much tax which is imposed by the government of that country where
the business will be conducted.
Economic uncertainty, legal complexity, copying by the local company.
The franchisor and the franchises both have some advantages.
Franchisors help franchisee to enter into foreign market which helps in the
expansion of the business and ultimately helps in increasing the profit.
It helps the franchisee by giving the idea about business which reduces
commercial risk or business risk.
International Joint Venture
The agreement which is done with a condition that the profit will be distributed
jointly with a foreign organization then it is known as international joint venture.
In this case, after completing a specific work or after finishing the period, the
agreement comes to and end. Here generally profit is distributive equally.
International joint venture also helps the companies in removing the commercial
barriers and helps in achieving economical stability, also helps in achieving
managerial and technical skills, ensure the stock of inventories and reduce
business risk. Companies engage themselves with international joint venture in
order to reduce the expenses of the business. For a stable position in the
competitive market one should achieve more and more new skills.
Advantages of International Joint Venture
There are so many advantages of international joint venture. The advantages are
described below1. There is no need to form new company. Only agreement is needed.
2. Capital is invested jointly.
3. The necessary steps which should be taken are mentioned in the agreement.
So, it helps in reducing future complexities. Sometimes the partners of
international joint venture make bill on the supply of technology and it may
be a great cause of failure.
4. For the differences of the structural and indigenous culture of the mangers
and employees of international joint venture may fail the organization.

5. For the differences in the managerial ideas, objectives and goals, the failure
may come.
6. A business of international joint venture will be failed; if it is taken at the
time of weak economic condition or it the local authority shows the
negative expression.
7. In this case, the business is conducted on both home countries. So, they can
enjoy location advantages.
Disadvantages of International Joint Venture
Besides these there are some disadvantages which are as follows:
1. International joint venture is risky. Because this business is started with a
specific objective. If here the loss occurred, there is no alternative way to
fulfill this loss.
2. Sometimes it is impossible to take decision quickly. Because the partners
stay in different places and sometimes it is difficult to communicate with
one another.
Foreign Direct Investment
When one company invests in the other countries directly then it is known as
foreign direct investment. It may occur by taking an existing company in the
foreign country or by forming a new company. There is so much foreign direct
investment in our country.
Many foreign investors directly invest in the export processing zone. A company
should conduct its production activities in the foreign market for entering into
foreign market by following this method. It may happen by taking the ownership
for a company in the foreign market or by forming a new company. The foreign
direct investment is appropriate for a company only when1. In where the business in familiar to all people, the market of that country
will wide.
2. The market of a company must be near to that company in which countrys
the business in conducted.
3. The company has sufficient knowledge and experience about the
international market.
4. The market of that country where the business will be conducted must be
competitive.
5. The company has competitive and technological advantages.
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Foreign investment may be considered as a good investment in the following

sections1. If the host countrys market is too large.
2. If the host country and the home country is situated too nearly.
3. If the home country has so much experience about foreign business.
4. If the home country obtain greater technological advantages.
Advantages of Foreign Direct Investment
The advantages of foreign direct investment is described below1. The activities of the company can be controlled directly. The company
takes the decisions itself about the types of strategy and how the strategy
will be fruitful.
2. Company will achieve comparative advantages.
3. Profit can be increase by reducing the cost of production and supply.
4. Company gives the opportunity to the host country in producing and
marketing the product.
5. Goodwill can be achieved by producing quality product with a low cost and
by selling it.
6. Company can increase its controlling power on the foreign activities by the
foreign direct investment. As a result, company can specified it necessary
strategies, and can take effective steps to implement these strategies.
7. This method influences in increasing revenue and in development by using
the competitive skills and opportunities in the foreign market.
8. The expenditure structure of a company is specified by reducing the
production and supply cost. By reducing his cost company can increase
competitive opportunities.
9. Foreign investment increases the goodwill of the company in the local
market.
Disadvantages of Foreign Direct Investment
There are some disadvantages in the international direct investment. There
disadvantage are1. In international direct investment, home country in more committed. If this
commitment can not be fulfilled with the local people, then the goodwill
will be destroyed.
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2. In the case of direct investment, it takes too much time to return the
invested money.
3. One should maintain the rules and regulations strictly in the foreign direct
investment. Besides this, here is too much political pressure; the possibility
of crime is large, etc.
4. A large amount of capital is needed in the case of foreign direct investment
than the other methods of entering into foreign market. This is very much
important at the primary stage. In most cases, the demand and necessity of
large amount of capital make uninterested the small and new business
persons.
5. In the case of foreign direct investment it takes much time to return the
invested capital and it leads to increase the business risk. In the foreign
direct investment business, the capital in needed to invest and to develop
year after year.
6. The companies which want to leave or stop foreign activities, in this case
foreign direct investment creates so much problems. In the foreign direct
investment, one important mater should be considered that is if the
company wants to sustain in the market then what should it do.
One way may be find out the local customers. Otherwise, the company can
sale this proportion to the other company. In this case, it will be difficult to
find out the customers.
7. Sometimes it is very difficult to make decisions about foreign direct
investment. Here the social, economical, political and cultural factors
should be considered. Strictly of that country where the business will be
conducted. By examining these factors, their affect on the companys
activities should specify.
8. Sometimes the people of a country seem that those organizations are not
patriots who are involved with the foreign direct investment.

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