International entrepreneurship opportunities

MODULE 6

ASSIGNMENT

• Barriers to international trade
• Tariff barriers

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• International v/s domestic entrepreneurship

International entrepreneur

• Process of discovering and creatively exploiting opportunities that exists outside one's own country with the competitive advantage wherein important discovery and exploitation of opportunities is
• It is a combination of innovative proactive and risk-seeking behavior that crosses national borders and is intended to create value in organizations.
• This deals with general aspects of being global and identifying global opportunities.
• Issues covered are importance of internationalization, globalisation and the international environment for new venture, aspects of global business etc

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Nature of international entrepreneurship

• Integration of economies
• International competition
• Mutually acceptable currency
• Different national policies and intervention:
• Proactive or reactive based on opportunities/threats

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Importance of international business

• Superior technological know-how
• Larger size and economies of scale
• Lower input costs due to large size
• Ability to access raw materials overseas
• Ability to shift production overseas

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• Economies of scale in shipment/distribution
• Brand image and goodwill advantage
• Access to low cost financing
• Information advantage
• Managerial expertise and experience

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• Diversification of risks

Rostow's model of stages of economic development

• According to Rostow, 1960 countries pass through stages of development
• 1. Traditional society – subsistence, barter, Agriculture, limited capital, traditional methods of production
• 2. transitional stage – specialisation leading to surpluses, transport infrastructure develops, income/savings/investment, entrepreneurship develops, external trade opens
• 3. Take-off – Industrialisation develops, works shift to secondary sector, growth concentrated in a few regions or industries, reaches 10% of GNP

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• new political and social institutions develop, more savings and investments

Rostow's model

• 4. Drive to maturity – diversification to new areas, producing wide range and less reliance to imports
• 5. high mass consumption – mass consumption, consumerism flourishes, service sector becomes dominant

According to Rostow development requires substantial investment given in stage 3 after reaching stage 2 leads to economic growth.

Limitations of the model:

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• Based on western culture and not India
• Too generalised
• doesn't detail preconditions for growth
• Difficult to identify stages as they are merged

Just a growth model highlighting need for investment for the sake of development

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Entry modes to international business

• Method of entry into an international market depends upon the entrepreneur and the company's strengths and weaknesses
• Entry modes can be broadly categorized into 3 categories:
  • exporting as an entry strategy
  • manufacturing strategies without FDI
  • manufacturing strategies with FDI

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Exporting

• Strategy to enter a foreign market with least commitment. If markets there aren't large enough to set up own manufacturing facilities, manufactured to derive economies of scale and economies of scope and quality advantage. However, managers in foreign markets need to be responsive to customer needs.
• Forms of exporting: includes indirect exporting and direct exporting
• Indirect exporting is exporting through others; resources are limited which have limited resources. Objective is to sell abroad and overseas with minimum expenses and inconvenience. They can easily withdraw when their home country sales improve. Investment is low but control is also low on how when and where the products are sold. Sometimes they are not even aware of their exporting.
• There are 4 methods of indirect exporting.
• 1. Domestic purchase: some companies are contacted by foreign companies who purchase at factory gate and export without distributing. Local subcontractors and OEMs fall in this category with limited knowledge and access to the company.

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Exporting

• Export houses: export houses or export marketing specialist companies setup to act as export departments for other companies. They can facilitate small and medium companies in their international trade. They also provide indirect exporting information and contacts.
• Piggybacking: an established international distributor or manufacturer is used to carry the products of another. The second manufacturer rides on the back of reputation, sales and administration of the carrier with no direct involvement. He pays a commission, or he buys the products and distributes them.
• Trading companies: trading companies from the west play an important role in indirect exports. African trading companies and sogo shosyas of japan are classical examples.

Exporting

• Direct exporting:
• for long term interest in international markets, the company needs to proactively export. Requires commitment and resources to be invested into a number of supporting activities which can be a huge financial burden on the company. Hence timing becomes critical. So very careful and gradual transition is important.

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Manufacturing without FDI

• Strategy involving manufacturing and service supply from abroad. If huge costs and risks manufacture can be without direct investment.
• licensing: under a licensing agreement a company (licensor) transfers property to another company (licensee) for a specified period and pays a royalty to the licensor. Rights may be exclusive or non-exclusive.
• Most common for the use of patents, trademarks, copyrights etc. Licensor does not risk tangible assets like plant and machinery and have to develop intangible asset on their own.
• It permits a foreign company to use industrial property to operate in a country or in other countries
• Multinational companies commonly license their own subsidiaries legal ownership of industrial property., to facilitate repatriation to home and host governments. Many indian companies have licensed in other countries eg Ranbaxy in indonesia and jordan

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Manufacturing without FDI

• Franchising:
• Means of marketing goods and services. Franchiser grants the legal rights to use branding trademarks, trade names and method of operation is transferred to the franchisee - in return for a fee. The franchiser provides assistance and help with sourcing and exercises significant control over the franchisee's method of operation.
• Franchisee invests in capital but is considered an employee. Franchiser has the advantage of greater market penetration withoput having to invest in capital
• Chan identifies 2 types of franchise. Viz product/trade franchise and business format franchise.

• Product/trade franchise is like car dealerships, petrol service station, soft drinks bottlers where franchisees are granted right to distribute manufacturer's product in a specified area.

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• Business format franchise includes many service businesses like restaurants, convenience stores, hotels, this includes licensing of trade marks, trade names, system of operating the business and characteristics of the location
• One has to decide to what extent the business format must take into account local demands and expectations. McDonad, Pizzahut and KFC have catered to local tastes in different countries.

• Contract manufacturing:
• Firm engaged in international business hires local manufacturers to produce the product under a contract. Nike and Gap use contract manufacturers. It gives cost economies advantage is that the company can concentrate on sales and marketing. Also, if the market fails a minimum withdrawal becomes easy.
• It helps to overcome trade barriers

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• Sometimes it is the only way where local content rules require local employment
• During political uncertainty it is better not to invest in production capacity.

• Turnkey projects:
• Turnkey projects are common in infrastructure projects in supply, erection and commissioning of projects like oil refineries, steel plants, cement plants, power plants,; construction projects as well as management agreements.
• It is a contract under which a firm agrees to fully design, construct and equip a manufacturing/business/service facility and turn the project over to the purchaser when it is ready for operation for remuneration . Form of remuneration includes fixed price, or on a cost plus basis.

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• Management contracts:
• Companies with low level technology or marketing or management expertise may go for a management contract with a foreign company for a specified period for a monetary consideration.
• Compensation can be in the form of a fixed fee or a percentage of sales or performance.
• Some Indian companies like Tata Tea and Harrisons Malayalam have contract to run tea estates in Sri Lanka.

Manufacturing with FDI

• FDI is the process where residents of one country acquire ownership of assets in a host country for the purpose of controlling production distribution and other activities of the firm.

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• FDI in which wholly owned manufacturing facilities are considered by global firms in order to
  • acquire raw materials
  • operate at lower manufacturing costs
  • for avoiding tariff barriers
  • satisfy local content requirements
  • for penetrating local market

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Manufacturing strategy with FDI includes

Manufacturing with FDI

• Joint ventures:
• Joint venture is any kind of cooperative strategy involving two or more independent companies which results in the establishment of a third entity organisation which is owned by the parent companies. Each company has a stake in the venture here. Stake may be as low as 10% but can influence strategic decision making.
• Indian pharma companies have made joint ventures eg companies like Ranbaxy Lupin and Dr Reddy's

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• In many cases joint ventures have helped the foreign company in local market stabilise

Manufacturing with FDI

• Mergers:
• Merger (amalgamation, consolidation, integration) is a process of two or more organisations in which one acquires the assets and liabilities of the other in exchange for shares or cash. Usually both the organisations are dissolved and the assets are combined and new stock is issued.
• It is a combination of equals and the board is represented by either company.
• Asian pains, Essel packaging have merged with foreign firms to gain foothold in international market.

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Manufacturing with FDI

• Acquisitions
• Acquisition is purchasing an existing venture. Easier to implement.
• One must be careful about payments so as not to overpay.
• Notion that acquisition is a faster way than organic growth.
• It may take considerable time to search and evaluate the target and integrate.

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• It is a transaction in which a firm buys a controlling interest in another with an intention of making it a subsidiary business or integrating it with its existing business.
• Some firms adopt acquisition as a one time strategy to enter a particular market but for some other it is a strategy. A well-planned acquisition strategy ensures firm's growth.

Manufacturing with FDI

• Wholly-owned subsidiary
• It is the most expensive way of entering foreign markets and requires greatest commitment in terms of time resources and capital. It is used when the market is assured. It helps companies to maintain tight control and ownership on foreign opearations.
• Wholly owned subsidiary meana 100% ownership by the parent company. The subsidiary has a different name and operates under the control of the holding company.

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• Location in a different country is one of the main reasons. Companies are not absorbed but run as a subsidiary. Political, regulatory and financial factors are the other reasons.

ASSIGNMENT

• Strategic alliances:
• Assembly operations: