What does International Business Mean?
The term "international business" refers to a wide range of activities undertaken by many organisations to gain access to foreign markets; however, it is not widely used because the average person cannot identify the activities as being part of international business. There are several approaches that businesses looking to do business internationally can take, which are referred to as modes of international business.
Modes of Entering International Business
Why Should Companies Expand Globally?
A truly international corporation has a globally distributed supply chain. Even if a global supply chain has flaws that are frequently beyond a company's control, there are various reasons why a company might want to explore foreign markets.
Reasons Why Companies Should Expand Globally
Companies Usually Decide To Enter International Markets For The Following Reasons:
1. Determine Which Markets Will Be More Profitable
This is why many domestic companies are expanding into international markets. A global market's purchasing power may increase, resulting in higher earnings for the same products. This excludes the initial go-to-market costs associated with entering that foreign market.
2. Revenue Growth
One of the primary benefits of globalisation is an increase in revenue. International marketing allows you to reach a larger audience than your local market, which increases sales more effectively. Global expansion is required for business growth that is not limited to the typical revenue your local market can provide for your organisation.
3. Savings Increase
While going global increases profit potential, it also allows for lower expenses. Doing business abroad is typically less expensive because you can cut production costs in countries with lower wages. Because of the disparity in minimum wages around the world, you may have to pay your overseas employees less in salary than your local employees. Apple, for example, outsources manufacturing to China to save money on labour.
Different Modes of Entering International Business
Types of Entry Modes in International Business
Below are the different modes of international business -
The traditional mode of entering into international business is Exporting. Exporting is the simplest way to get started in foreign business. As a result, most businesses begin their global expansion in this manner. The act of selling goods and services produced domestically in other countries is known as exporting. Exports are classified into two types:
Direct exports are transactions in which a company sells its products directly to a buyer in another country. At this company, you will gain firsthand market knowledge.
Indirect exports include hiring a third party's skills to facilitate the transaction. The fee is the amount charged by the intermediary for its services.
In this mode of entry, a manufacturer from the home country rents the right to their intellectual properties, such as technology, copyrights, brand names, and so on, to a manufacturer from a foreign country. To obtain the license, you must pay a set fee. Lessees are manufacturers who lease, and licensees are manufacturers from the country that receives the license. Essentially, the licensee is purchasing another company's assets (know-how or R&D). The licensor may grant these rights non-exclusively to a single licensee or exclusively to one or more licensees.
A separate company known as the franchisee operates under the brand of a different organisation known as the franchisor in this model.
Because of franchising, a franchisee can use a name, procedure, method, or trademark. Furthermore, the franchisor company provides raw materials, assists the franchisee with business operations, or does both.
4. Management Contracts
A company essentially rents out its knowledge or know-how to a government or business in the form of individuals who enter the foreign setting and manage the business under management contracts and do contract manufacturing.
This strategy of entering international markets is frequently used with a new facility after a company has been seized by the national government or when a business is experiencing difficulties.
5. Foreign Direct Investment
A corporation can enter a foreign market through foreign direct investment by investing significantly there. Foreign direct investment can be used to enter the global market through mergers and acquisitions, joint ventures, and greenfield investments. This strategy is appropriate when there is sufficient demand, market size, or market growth potential to justify the investment.
6. Joint Endeavors
A joint venture is one of the preferred ways to enter the global market for companies that don't mind sharing their brand, knowledge, and expertise.
Companies that want to expand into international markets can form joint ventures with local companies in those markets, in which both joint venture partners share the benefits and risks of the business.
The investment, costs, profits, and losses are allocated to the two corporate units in accordance with a predetermined ratio.
This method of entering the global market is suitable for countries where the government prohibits 100 percent foreign ownership in certain industries.
Case Study - Different Modes of Entering International Business
In 1994, the corporation began offering free coffee to visitors in several Beijing hotels to promote the Starbucks brand. This campaign demonstrated that their goods had a sizable market in China, particularly among foreigners. People in the area who attempted to emulate Western culture expressed a desire to drink coffee. Western brands and goods enticed the younger generation as well. These factors prompted Starbucks executives to investigate and comprehend the Asian country's economic environment.
Even though Starbucks encountered numerous challenges when attempting to enter the Chinese market, by 2012, they had successfully expanded their business into over 20 large or medium-sized Chinese cities, with over 560 stores opened. The incredible achievement is due to meticulous marketing analysis and various marketing methods used at various times. These strategies typically refer to joint ventures and license agreements as two distinct methods of entering international markets.
So, above are the methods of entry into foreign markets. Before entering the global market, the company must make a critical decision regarding its operational business plan. The best international business model should be selected based on the company's expansion and diversification requirements. The company's ability and willingness to devote resources, the desired level of control, the level of risk the company is willing to accept, the level of competition, the calibre of the infrastructure, and other factors must all be considered.
FAQs on Different Modes of Entering International Business
1. What are strategic acquisitions? What are some of its major advantages?
Strategic acquisition implies that your company purchases a majority stake in an established foreign company. This acquired company may participate in providing comparable goods or services in foreign markets, either directly or indirectly.
You can keep the newly purchased firm's current management in place to gain access to their skills, knowledge, and experience while also appointing members of your team to the company's board. Advantages are
You do not have to start your company from scratch because you can use existing infrastructure, manufacturing facilities, distribution channels, market share, and clientele.
By retaining current management and key personnel, your company will benefit from their skills, knowledge, and experience.
It is one of the quickest ways to launch a significant international business.
2. What do you mean by direct exporting?
The practice of a company selling its goods directly to consumers rather than through a middleman such as a distributor or agency is referred to as direct exporting. Compared to indirect exporting, this type of exporting provides greater control over overseas processes. As a result, this option frequently increases profit and sales potential. Furthermore, more risk is involved, necessitating more monetary and human resources.
The roles of agents and distributors are distinct. An agent's sales are based on commissions, whereas a distributor's income is derived from the difference between the price at which the goods are purchased and the amount charged to wholesalers or retailers.
3. What is indirect exporting?
Direct exports can be accomplished in one of three ways: directly to the final customer, with the assistance of a representative, or by establishing the exporting firm. When a company exports its goods through a direct relationship with a foreign country, the investment risks are higher. On the other hand, the company may be able to increase its potential profit margins while lowering the cost of international transactions.