Modes of Entry into International Business
A firm can enter into international business in different manners or ways. Here, the ‘mode’ refers to the ways through which a firm can enter into international business. They are mentioned below:
1. Exporting and Importing
Exporting goods and services refers to sending them from the home country to a foreign country. Similarly, Importing goods and services means purchasing or bringing them from the foreign market to the home country. This is the easiest way a firm can get into international business as it requires almost no investment in setting up a production unit in the foreign country, only distribution channels are made to successfully import or export goods. There are two ways a firm can export or import:
- Direct Exporting/Importing: In Direct Exporting/Importing a firm directly deals with the customer/supplier of the foreign country.
- Indirect Exporting/Importing: In Indirect Exporting/Importing a firm doesn’t deal with the customer/supplier directly but with the help of some middlemen.
2. Contract Manufacturing
Contract Manufacturing or Outsourcing can be defined as a type of international business where a firm establishes a contract with one or a few local manufacturers in foreign countries to produce goods as per the firm’s specifications and requirements. It can be done in three ways:
- Some intermediate products can be produced through contract manufacturing such as automobile components from which final products can be made later.
- Assembling of products such as laptops, computers, or mobile phones can be done through contract manufacturing.
- Complete manufacturing of products such as garments.
3. Licensing and Franchising
Licensing and Franchising is yet another way a firm can enter into international business. Licensing can be defined as a contractual agreement in which one firm (Licensor) allows another firm (Licensee) of a foreign country to use its patents, copyrights, trade secrets, or technology. Licensee in return gives some amount of royalty or commission to the licensor. When there is a mutual exchange of knowledge, technology or patents happens between firms then it is called cross-licensing.
Franchising is almost the same as licensing. In franchising business also, a firm enters into a contract with a firm of a foreign country but it is done for service-oriented industries. Franchising business is also slightly different from licensing from the point of view of stringent rules and regulations. In the franchising business, strict rules and regulations are made as to how the franchisees should operate while running the business.
4. Joint Ventures
A joint venture can be referred to as a unit jointly established by two or more two firms. It is a form of association between two or more firms. A foreign firm collaborates with one or some domestic firms to set up a company jointly owned by both or all of them. A joint venture may be brought up in three ways:
- A foreign company buying a stake in a domestic company.
- A domestic company buying a stake in an existing foreign company.
- Both the foreign and domestic companies jointly establish a new firm.
5. Wholly Owned Subsidiaries
When a foreign company establishes a business unit or acquires a full stake in any domestic company, then they are called wholly-owned subsidiaries. Wholly owned subsidiaries are set by a foreign company to enjoy full control over their overseas operations. A wholly-owned subsidiary in a foreign country may be established in two ways:
- Setting up of wholly-owned new firm in the foreign land, also called Green Field Venture.
- Acquiring an established firm in a foreign country and using that firm to do business in a foreign country.