The international business provides much broader than domestic trade. International business refers to those business activities that take place across national boundaries. As we all know International businesses play a very important role in global growth. The question arises of how business can enter into the international business. There are several ways of entering into the international business that we will discuss here. That will guide you to know which model is more suitable under what conditions.
Export and import
This is one of the east ways of entering into international trade. Exporting refers to sales of goods and services to a foreign country. Similarly, importing is purchasing goods and services from other nations. The export and import are majorly classified into two parts; 1) direct importing and exporting. 2) Indirect importing and exporting.
- Direct importing and exporting: these include the sales of goods and services from the firm to the foreign seller directly. Direct import and export businesses have information about the market and they do not require a middle man for selling products.
- Indirect import and export: in this type of business either importers or exporters hire a middle man for operating most task-related import and export of goods and services to overseas businesses and consumers as well.
These are the most common advantages of importing and exporting international business.
- This is one of the easiest ways to gain entry into international business. Importing and exporting way is not involving complex activity for setting up as compared to managing joint ventures or wholly-owned subsidiaries abroad.
- Since the importing and exporting trade does not require a huge amount of investment in the starting of the type of trade this is the reason the risk of foreign investment is nil or much lower than other modes of entry into international business.
There are major limitations of exporting/importing as entry modes of international business are as follows:
- Exporting goods may become more expensive because the goods are physically moved from one place to another. It includes many expenses like transportation and insurance costs, packaging costs, taxes, customs duties, and many more.
- Exporting is not a feasible option when import is restrictions exist in foreign countries.
- The exporter can lose their additional market because the local competitors sell copies of their products or services in the market.
License and franchise
Licensing is a business agreement between two firms that one firm grant access to its technology, trade services, and patents to another firm in exchange for a fee that is known as a royalty. The firm provides permission to another foreign business that is also known as the licensee.
Franchising is as similar to licensing. But one major distinction between the two is that the former is use the connection of the production and marketing of goods. The franchisee will help the franchisor with the operation of the franchise and supplies raw material. Franchisee gives grants regarding process, name, method, and trademark as well.
There are several advantages and disadvantages of licensing and franchising that are listed below.
- This is one of the less expensive modes of entering into international business. licensor\ franchiser who set up the business and invests in the business. In this case, the licensor\franchiser has to virtually make no investment abroad.
- Since there is not a big foreign investment. This is the reason the risk is also very low.
- A licensee\ franchisee is a local person they have good knowledge about the domestic market. This will help the licensor in successfully conducting its marketing operations.
- As per the licensing\franchising agreement, only the parties to licensing\franchising agreements are allowed to use the copyrights, patents, and brand name in foreign.
This type of mode of the international business suffers from the following weakness.
- When a licensee\franchisee became skilled in manufacturing and marketing the licensed\ franchised product. There is a threat for the licensor that the licensee may start marketing an identical product under a slightly different brand name.
- Over time, there are several conflicts between the business regarding maintenance of accounts, payments of royalty, quality of production, and many more.
- If the licensor\ franchiser fails to the maintain secrets of the business then it can be because of several losses to the licensor\ franchiser.
Wholly owned subsidiaries
This entry mode of international business is taken by the companies which want whole control over their overseas operations. The parental company acquires 100 percent control by making full investment and its equity capital as well. A wholly-owned subsidiary in a foreign market can classify in two ways.
- By setting up a new company in a foreign market.
The second way is taking over an established firm in a foreign nation and using that firm for manufacturing and promoting its products in the host nation.
There are several advantages of a wholly-owned subsidiary in a foreign country which are following.
- The parental company has full control over the operation of the business in a foreign nation.
- It has no risk about the sharing of secrets of business. Because the parent company has control over the entire operations of the business.
- This is one of the expensive ways of entering into international business. Acquiring the whole stake in the company requires a lot of investment.
- The risks of losses are very high because the parental company has to bear the whole loss resulting from the failure of its foreign operation.