Types of international business

Different types of international business with suiable examples

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1. INTERNATIONALISATION

Internationalisation is the process through which a firm expands its business outside the
national (domestic) market
Firms go international:
 to enter new output markets
 to reduce costs and enhance competitiveness
 to exploit their own core competences in new markets
 to share risks over a larger market
 to take advantage of lower labour cost, lower taxation, cheaper natural resources
(sometimes, because the domestic market is just too small for company growth)

Firms generally go international by exporting their products first, then by establishing sale
representatives in the foreign countries, and then possibly setting up production facilities
Eventually, international firms may develop into:

Multinational corporations (MNC): a firm that carries out its value chains in more than one
country. It is generally headquartered in one home country while it also operates in one or
more host countries.

Trans-national corporations (TNC): a MNC that does not identify itself with any specific
nation, but acquires truly international (i.e., not country-dependent) features and high local
responsiveness.

Theories about international trade and localisation:
 Absolute cost advantage (Smith, 1776)
 Comparative cost advantage (Ricardo, 1817)
 Size of economic activity and distance (“gravity model of trade”)
 Market imperfections to exploit (e.g., proprietary technology, exclusive control of
inputs, scale economies, control of distribution channels, etc.)
 Higher returns to scale and network effects that (possibly in conjunction with
favourable government policies) shield industries from international competition
(“new trade theory”)

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Advantages

1. Faster growth
2. Access to cheaper inputs
3. Effect on performance of enterprise

Key Motivators to Internationalization




2. TYPES OF INTERNATIONAL BUSINESS

There are number of ways for internationalization / globalization of business. these are
referred as foreign market entry strategies. Each of these ways has certain advantages and
disadvantages. One strategy for a particular business may not be very suitable for another
business with different environment. Therefore it is quite common that a company employs
different strategies for different markets.

LICENSING

Licensing gives a licensee certain rights or resources to manufacture and/or market a certain
product in a host country.

 Licensing is a business agreement involving two companies: one gives the other special
permissions, such as using patents or copyrights, in exchange for payment.
 An international business licensing agreement involves two firms from different countries,
with the licensee receiving the rights or resources to manufacture in the foreign country.
 Rights or resources may include patents, copyrights, technology, managerial skills, or
other factors necessary to manufacture the good.

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 Advantages of expanding internationally using international licensing include: the ability
to reach new markets that may be closed by trade restrictions and the ability to expand
without too much risk or capital investment.
 Disadvantages include the risk of an incompetent foreign partner firm and lower income
compared to other modes of international expansion.

Example
o Suppose Company A, a manufacturer and seller of Baubles, was based in the
US and wanted to expand to the Chinese market with an international business
license. They can enter the agreement with a Chinese firm, allowing them to
use their product patent and giving other resources, in return for a payment.
The Chinese firm can then manufacture and sell Baubles in China.


FRANCHISING

Franchising is the practice of licensing another firm's business model as an operator.

 Essentially, and in terms of distribution, the franchiser is a supplier who allows an
operator, or a franchisee, to use the supplier's trademark and distribute the supplier's goods. In
return, the operator pays the supplier a fee.
 Thirty three countries, including the United States, China, and Australia, have laws that
explicitly regulate franchising, with the majority of all other countries having laws which
have a direct or indirect impact on franchising.
 Franchise agreements carry no guarantees or warranties, and the franchisee has little or no
recourse to legal intervention in the event of a dispute.

Franchising is the practice of using another firm's successful business model. For the
franchiser, the franchise is an alternative to building "chain stores" to distribute goods that
avoids the investments and liability of a chain. The franchiser's success depends on the
success of the franchisees. The franchisee is said to have a greater incentive than a direct
employee because he or she has a direct stake in the business. Essentially, and in terms of
distribution, the franchiser is a supplier who allows an operator, or a franchisee, to use the
supplier's trademark and distribute the supplier's goods. In return, the operator pays the
supplier a fee.

In short, in terms of distribution, the franchiser is a supplier who allows an operator, or a
franchisee, to use the supplier's trademark and distribute the supplier's goods. In return, the
operator pays the supplier a fee.
Each party to a franchise has several interests to protect. The franchiser is involved in
securing protection for the trademark, controlling the business concept, and securing know
how. The franchisee is obligated to carry out the services for which the trademark has been
made prominent or famous. There is a great deal of standardization required. The place of
service has to bear the franchiser's signs, logos, and trademark in a prominent place. The
uniforms worn by the staff of the franchisee have to be of a particular design and color. The
service has to be in accordance with the pattern followed by the franchiser in the successful
franchise operations. Thus, franchisees are not in full control of the business, as they would
be in retailing.

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EXPORTING

Exporting is the practice of shipping goods from the domestic country to a foreign country.

 This term export is derived from the conceptual meaning as to ship the goods and services
out of the port of a country.
 In national accounts "exports" consist of transactions in goods and services (sales, barter,
gifts or grants) from residents to non-residents.
 Statistics on international trade do not record smuggled goods or flows of illegal services.
A small fraction of the smuggled goods and illegal services may nevertheless be included in
official trade statistics through dummy shipments that serve to conceal the illegal nature of
the activities.

Example
o When individuals from Country A purchase goods from Country B, this
process is known as exporting for Country B (since their goods are being sold)
and importing for Country A (since they are buying the goods).


IMPORTING

Imports are the inflow of goods and services into a country's market for consumption.


 A country specializes in the export of goods for which it has a comparative advantage and
imports those for which it has a comparative disadvantage. By doing so, the country can
increase its welfare.
 Comparative advantage describes the ability of a country to produce one specific good
more efficiently than other goods.
 A country enhances its welfare by importing a broader range of higher-quality goods and
services at lower cost than it could produce domestically.

Example
o A country in certain tropical areas of the world has a comparative advantage at
growing crops like sugar or coffee beans, but it would be much less efficient at
growing wheat (due to the climate). Therefore, they should export their
sugar/coffee beans and import wheat at a lower cost than trying to grow wheat
themselves.


CONTRACT MANUFACTURING

In contract manufacturing, a hiring firm makes an agreement with the contract manufacturer
to produce and ship the hiring firm's goods.


 A hiring firm may enter a contract with a contract manufacturer (CM) to produce
components or final products on behalf of the hiring firm for some agreed-upon price.
 There are many benefits to contract manufacturing, and companies are finding many
reasons why they should be outsourcing their production to other companies.

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 Production outside of the company does come with many risks attached. Companies must
first identify their core competencies before deciding about contract manufacture.

A contract manufacturer ("CM") is a manufacturer that enters into a contract with a firm to
produce components or products for that firm . It is a form of outsourcing. In a contract
manufacturing business model, the hiring firm approaches the contract manufacturer with a
design or formula. The contract manufacturer will quote the parts based on processes, labor,
tooling, and material costs. Typically a hiring firm will request quotes from multiple CMs.
After the bidding process is complete, the hiring firm will select a source, and then, for the
agreed-upon price, the CM acts as the hiring firm's factory, producing and shipping units of
the design on behalf of the hiring firm.

JOINT VENTURES

In a joint venture business model, two or more parties agree to invest time, equity, and effort
for the development of a new shared project.

 Joint business ventures involve two parties contributing their own equity and resources to
develop a new project. The enterprise, revenues, expenses and assets are shared by the
involved parties.
 Since money is involved in a joint venture, it is necessary to have a strategic plan in place.
 As the cost of starting new projects is generally high, a joint venture allows both parties to
share the burden of the project as well as the resulting profits.

Example
o Sony Ericsson is a joint venture between Swedish telecom corporation
Ericsson and Japanese electronics manufacturer Sony to develop cellular
devices.

OUTSOURCING

Outsourcing business functions to developing foreign countries has become a popular way for
companies to reduce cost.

 Outsourcing is the contracting of business processes to external firms, usually in
developing countries where labor costs are cheaper.
 This practice has increased in prevalence due to better technology and improvements in
the educational standards of the countries to which jobs are outsourced.
 The opposite of outsourcing is called insourcing, and it is sometimes accomplished via
vertical integration. However, a business can provide a contract service to another business
without necessarily insourcing that business process.

Example
o Corporations may outsource their helpdesk or customer service functions to
3rd party call centers in foreign countries because these skilled laborers can do
these jobs at a lesser cost than their equivalents in the domestic country.

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OFF SHORING

Offshoring entails a company moving a business process from one country to another.


 Offshoring is the relocation of certain business processes from one country to the other,
resulting in large tax breaks and lower labor costs.
 Offshoring can cause controversy in a company's domestic country since it is perceived to
impact the domestic employment situation negatively.
 Offshoring of a company's services that were previously produced domestically can be
advantageous in lowering operation costs, but has incited some controversy over the
economic implications.

"Offshoring" is a company's relocation of a business process from one country to another.
This typically involves an operational process, such as manufacturing, or a supporting
process, such as accounting. Even state governments employ offshoring. More recently,
offshoring has been associated primarily with the sourcing of technical and administrative
services that support both domestic and global operations conducted outside a given home
country by means of internal (captive) or external (outsourcing) delivery models.The subject
of offshoring, also known as "outsourcing," has produced considerable controversy in the
United States. Offshoring for U.S. companies can result in large tax breaks and low-cost
labor.

MULTINATIONAL FIRMS

With the advent of improved communication and technology, corporations have been able to
expand into multiple countries.

 Multinational corporations operate in multiple countries.
 MNCs have considerable bargaining power and may negotiate business or trade policies
with success.
 A corporation may choose to locate in a special economic zone, a geographical region that
has economic and other laws that are more free-market-oriented than a country's typical or
national laws.

Example
o McDonalds operates in over 119 different countries, making it a fairly large
MNC by any standard

DIRECT INVESTMENT
FDI is practiced by companies in order to benefit from cheaper labor costs, tax exemptions,
and other privileges in that foreign country.

 FDI is the flow of investments from one company to production in a foreign nation, with
the purpose of lowering labor costs and gaining tax incentives.
 FDI can help the economic situations of developing countries, as well as facilitate
progressive internal policy reforms.
 A major contributing factor to increasing FDI flow was internal policy reform relating to
trade openness and participation in international trade agreements and institutions.

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Example
o Intel is headquartered in the United States, but it has made foreign direct
investments in a number of Southeast Asian countries where they produce
components of their products in Intel-owned factories.


COUNTERTRADE

Countertrade is a system of exchange in which goods and services are used as payment rather
than money.

 Countertrade is the exchange of goods or services for other goods or services. This system
can be typified as simple bartering, switch trading, counter purchase, buyback, or offset.
 Switch trading: Party A and B are countertrading salt for sugar. Party A may switch its
obligation to pay Party B to a third party, known as the switch trader. The switch trader gets
the sugar from Party B at a discount and sells it for money. The money is used as Party A's
payment to Party B.
 Counter purchase: Party A sells salt to Party B. Party A promises to make a future
purchase of sugar from Party B.
 Buyback: Party A builds a salt processing plant in Country B, providing capital to this
developing nation. In return, Country B pays Party A with salt from the plant.
 Offset agreement: Party A and Country B enter a contract where Party A agrees to buy
sugar from Country B to manufacture candy. Country B then buys that candy

Examples
o Bartering: One party gives salt in exchange for sugar from another party.
o Switch trading: Party A and Party B are countertrading salt for sugar. Party A
may switch its obligation to pay Party B to a third party, known as the switch
trader. The switch trader gets the sugar from Party B at a discount and sells it
for money. The money is used as Party A's payment to Party B.
o Counter purchase: Party A sells salt to Party B. Party A promises to make a
future purchase of sugar from Party B.
o Buyback: Party A builds a salt processing plant in Country B, providing
capital to this developing nation. In return, Country B pays Party A with salt
from the plant.
o Offset agreement: Party A and Country B enter a contract where Party A
agrees to buy sugar from Country B to manufacture candy. Country B then
buys that candy.