Unit IV going global:

ENTERING A FOREIGN MARKET

Introduction to subject

R ead the text and answer the questions that follow.

It seems clear that the business world of today is no longer limited by national boundaries and that organizations need to have a global perspective if they are to survive and prosper in this international environment. The international environment is complex because of the interactions and transactions that take place across national boundaries; this is the key difference between international companies and those that are essentially domestic.

The complexity of the international business environment means that international ventures are inherently more risky than purely domestic ones. For rational business decisions to justify international activities, therefore, there must be perceived benefits that outweigh risks.

Motives for international operations generally can be seen as either proactive or reactive.

Proactive international ventures are undertaken to take advantage of perceived opportunities; reactive ventures are undertaken in response to actions taken by other parties or to defend against perceived threats.

Proactive motives include resource availability, lower costs, incentives, offered by some governments to encourage companies to do business with or in a particular country or region (risk insurance, tax exemptions, interest-free loans, subsidies), new markets in foreign locations and international tax advantages. Economies of scale that are not available in a single country may be possible on a larger international scale. Many companies, however, do not actively seek international involvement; this can be because risks and costs are seen as too high the payoffs are seen as relatively low, or the company does not have adequate resources to pursue international opportunities actively. These companies, nevertheless, often find that globalization is forced on them because of events outside of their control.

Reactive motives include reacting to trade barriers, responding to international customers or competitors, and seeking to avoid home country regulations. Trade barriers imposed by trading partners who are customers for a company’s product or service often force a company to initiate international operations. These trade barriers can make a product or service too expensive for customers in the export market. However if the product or service is produced locally, it ceases to be subject to the trade barriers.

Also if the competition becomes international, a company may have to globalize to remain competitive. If competitors become well established in international markets, the domestic company may find it difficult to compete in these markets at a later stage. Home governments can impose regulations and restrictions that increase the cost of operating. If less rigorous regulations and restrictions exist elsewhere, other factors being equal, companies may decide to operate in this less restrictive environment.

The company that has decided to go global can make its entry into foreign markets in a variety of forms ranging from exports and imports, through licences and contracts, to ownership of foreign operations.

The intensification of global competition and the pace of technological progress mean that not even the most powerful multinational companies can afford to act independently. As both a defensive and offensive reaction to the global economic environment, inter-firm cooperation has developed on a variety of levels. The need to share costs and reduce risks associated with internationalization provides an essential basis for international strategic alliances between enterprises to be formed. Strategic alliances may be formal and informal, with joint equity holdings tending to formalize them. Examples of the different types of strategic alliances are given below.

Licensing

A licensing agreement is a legal contract under which the licensor confers certain rights upon the licensee for a specified duration in return for certain payments. The rights may consist of permission to use industrial property, rights such as patents, trade marks, brand names and copyrights; it can include secret unpatented know-how, such as methods of production, scheduling and quality control, which are usually combined with the provision of technical services.

Franchising

A franchise is a particular form of licensing agreement implying a continuing relationship in which the franchiser provides rights, usually including the use of a trade mark or a brand name, plus the services of technical assistance, training, merchandising and management, in return for certain payment or royalty.

Management contracts

A management contract is an arrangement under which operational control of an enterprise, or over one phase of its activities, which would normally be exercised by the board of directors or the managers elected or appointed by the owners, is vested by contract in a separate enterprise that performs the necessary managerial functions in return for a fee.

Joint ventures

A joint venture is a business association between two or more parties who agree to share the provision of equity capital, the investment risk, the control and decision making authority, and the profits or other benefits of the operation. The participating partners may be wholly private sector businesses or include private sector and public sector enterprises. Joint ventures are often likened to marriages. They usually entail a long-term relationship and may be the only way for some firms to enter a specific market. Foreign companies may be required by local regulations to have local owners, or they may choose to do so because of the perceived benefits associated with having local input. A foreign company may be more accepted because locals are seen as part of the decision making process and thus more responsive to local interests. In addition, local ownership ensures retention of some of the benefits of the operation for a host country. Many companies seek local partners because this input provides valuable local information which allows the foreign company to be more responsive to local needs. The benefits arising from the pooled resources, more effective market access, the scope for specialization and greater flexibility make joint ventures attractive.

Consortia

Consortia consist of a number of enterprises that may or may not be bound by joint equity holdings. The high cost and risks involved in research and technology-intensive production projects normally provide the pretext for the formation of consortia. Governments may play the key role in putting together a consortium of firms.