In truth, we have become part of a global village and have a global economy where no organization is insulted from the effects foreign markets and competition. Indeed, more and more firm are reshaping themselves for international competition and discovering new ways to exploit markets in every corner of the world. Failure to take a global perspective in one of the biggest mistakes managers can make. Thus we start laying the foundation for our discussion by introducing and describing the basic of international business.
International Business: An international business is one that is based primarily in a single country but acquires some meaningful share of its resources or revenues (or both) from other countries. Sears fits this description. Most of its stores are in the United States. For example, and the retailer earns around 90 percent of its revenues from its U. S. operation with the remaining 10 percent coming sears stores in Canada. At the same time, however, many of the products it sells, such as tools and clothing are made abroad from any perspective.
Then it is clear that we live in a truly global economy. Virtually all businesses today must be concerned with the competitive situations they face in lands for from home and with how companies from distant lands are competing in their homelands. Difference approaches to international business are given below:
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- Importing and Exporting
- Joint Venture
- Foreign Direct Investment
- Management contact
Importing and Exporting: Imports: Imports" consist of transactions in goods and services (sales, barter, gifts or grants) from non-residents residents to residents.
The exact definition of imports in national accounts includes and excludes specific "borderline" cases. A general delimitation of imports in national accounts is given below:
- An import of a good occurs when there is a change of ownership from a non-resident to a resident; this does not necessarily imply that the good in question physically crosses the frontier. However, in specific cases national accounts impute changes of ownership even though in legal terms no change of ownership takes place (e. g. ross border financial leasing, cross border deliveries between affiliates of the same enterprise, goods crossing the border for significant processing to order or repair).nAlso, smuggled goods must be included in the import measurement.
- Imports of services consist of all services rendered by non-residents to residents. In national accounts any direct purchases by residents outside the economic territory of a country are recorded as imports of services; therefore all expenditure by tourists in the economic territory of another country are considered as part of the imports of services.
Also, international flows of illegal services must be included. Basic trade statistics often differ in terms of definition and coverage from the requirements in the national accounts: • Data on international trade in goods are mostly obtained through declarations to custom services. If a country applies the general trade system, all goods entering the country are recorded as imports. If the special trade system (e. g. extra-EU trade statistics) is applied goods which are received into customs warehouses are not recorded in external trade statistics unless they subsequently go into free circulation of the importing country.
A special case is the intra-EU trade statistics. Since goods move freely between the member states of the EU without customs controls, statistics on trade in goods between the member states must be obtained through surveys. To reduce the statistical burden on the respondents small scale traders are excluded from the reporting obligation.
- Statistical recording of trade in services is based on declarations by banks to their central banks or by surveys of the main operators. In a globalized economy where services can be rendered via electronic means (e. . internet), the related international flows of services are difficult to identify.
- Basic statistics on international trade normally do not record smuggled goods or international 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 or dummy declarations that serve to conceal the illegal nature of the activities. Balance of trade Balance of trade represents a difference in value for import and export for a country.
A country has demand for an import when domestic quantity demanded exceeds domestic quantity supplied, or when the price of the good (or service) on the world market is less than the price on the domestic market. The balance of trade, usually denoted NX, is the difference between the value of the goods (and services) a country exports and the value of the goods the country imports: NX = X ? I, or equivalently I = X ? NX A trade deficit occurs when imports are large relative to exports. Imports are impacted principally by a country's income and its productive resources.
For example, the US imports oil from Canada even though the US has oil and Canada uses oil. However, consumers in the US are willing to pay more for the marginal barrel of oil than Canadian consumers are, because there is more oil demanded in the US than there is oil produced. In macroeconomic theory, the value of imports I can be modeled as a function of the domestic absorption A and the real exchange rate ?. These are the two largest factors of imports and they both affect imports positively: I = I(A,? ) Types of import There are two basic types of import: 1. Industrial and consumer goods 2. Intermediate goods and services
Companies import goods and services to supply to the domestic market at a cheaper price and better quality than competing goods manufactured in the domestic market. Companies import products that are not available in the local market. There are three broad types of importers:
- Looking for any product around the world to import and sell.
- Looking for foreign sourcing to get their products at the cheapest price.
- Using foreign sourcing as part of their global supply chain. Direct-import refers to a type of business importation involving a major retailer (e. g. Wal-Mart) and an overseas manufacturer.
A retailer typically purchases products designed by local companies that can be manufactured overseas. In a direct-import program, the retailer bypasses the local supplier (colloquial middle-man) and buys the final product directly from the manufacturer, possibly saving in added costs. This type of business is fairly recent and follows the trends of the global economy. Role of the Internet Many online auction websites are now providing wholesalers through a wholesale list, generally, the lists that require a fee to view, may not be updated frequently, the data may be old, and the companies listed may no longer be in business.
Another form of online middlemen are B2B trade companies. These cater mainly to big businesses who are importing large quantities of goods from foreign countries. They also have sister sites that serve smaller orders for small businesses. In addressing the concerns of listed companies' legitimacy and dependability, such B2B portals may inspect suppliers at their actual premises before they list suppliers. Alternatively, these companies may also branch out of cyberspace and organize their own sourcing fairs, where thousands of buyers and suppliers can meet face-to-face. Statistical data
Data on the value of imports and their quantities often broken down by detailed lists of products are available in statistical collections on international trade published by the statistical services of intergovernmental organizations (e. g. UNSTAT, FAOSTAT, OECD), supranational statistical institutes (e. g. Eurostat) and national statistical institutes. Exports: The definition of "export" is when you trade something out of the country. In economics, an export is any good or commodity, transported from one country to another country in a legitimate fashion, typically for use in trade.
In national accounts "exports" consist of transactions in goods and services (sales, barter, gifts or grants) from residents to non-residents. The exact definition of exports includes and excludes specific "borderline" cases. A general delimitation of exports in national accounts is given below:
- An export of a good occurs when there is a change of ownership from a resident to a non-resident; this does not necessarily imply that the good in question physically crosses the frontier. However, in specific cases national accounts impute changes of ownership even though in legal terms no change of ownership takes place (e. . cross border financial leasing, cross border deliveries between affiliates of the same enterprise, goods crossing the border for significant processing to order or repair). Also, smuggled goods must be included in the export measurement.
- Export of services consist of all services rendered by residents to non-residents. In national accounts any direct purchases by non-residents in the economic territory of a country are recorded as exports of services; therefore all expenditure by foreign tourists in the economic territory of a country is considered as part of the exports of services of that country.
Also international flows of illegal services must be included. Process Methods of export include a product or good or information being mailed, hand-delivered, shipped by air, shipped by boat, uploaded to an internet site, or downloaded from an internet site. Exports also include the distribution of information that can be sent in the form of an email, an email attachment, a fax or can be shared during a telephone conversation. Advantages of exporting Ownership advantages are the firm's specific assets, international experience, and the ability to develop either low-cost or differentiated products within the contacts of its value chain.
The vocational advantages of a particular market are a combination of market potential and investment risk. Internationalization advantages are the benefits of retaining a core competence within the company and threading it though the value chain rather than obtain to license, outsource, or sell it. In relation to the Eclectic paradigm, companies that have low levels of ownership advantages either do not enter foreign markets. If the company and its products are equipped with ownership advantage and internalization advantage, they enter through low-risk modes such as exporting.
Exporting requires significantly lower level of investment than other modes of international expansion, such as FDI. As you might expect, the lower risk of export typically results in a lower rate of return on sales than possible though other modes of international business. In other words, the usual return on export sales may not be tremendous, but neither is the risk. Exporting allows managers to exercise operation control but does not provide them the option to exercise as much marketing control.
An exporter usually resides far from the end consumer and often enlists various intermediaries to manage marketing activities. Disadvantages of exporting For Small-and-Medium Enterprises (SME) with less than 250 employees, selling goods and services to foreign markets seems to be more difficult than serving the domestic market. The lack of knowledge for trade regulations, cultural differences, different languages and foreign-exchange situations, as well as the strain of resources and staff, interact like a block for exporting.
Indeed there are some SME's which are exporting, but nearly two-third of them sell in only to one foreign market. The following assumption shows the main disadvantages:
- Financial management effort: To minimize the risk of exchange-rate fluctuation and transactions processes of export activity the financial management needs more capacity to cope the major effort
- Customer demand: International customers demand more services from their vendor like installation and startup of equipment, maintenance or more delivery services. Communication technologies improvement: The improvement of communication technologies in recent years enable the customer to interact with more suppliers while receiving more information and cheaper communications cost at the same time like 20 years ago. This leads to more transparency. The vendor is in duty to follow the real-time demand and to submit all transaction details.
- Management mistakes: The management might tap in some of the organizational pitfalls, like poor selection of oversea agents or distributors or chaotic global organization. Ways of exporting
The company can decide to export directly or indirectly to a foreign country. Direct selling in export strategy Direct selling involves sales representatives, distributors, or retailers who are located outside the exporter's home country. Direct exports are goods and services that are sold to an independent party outside of the exporter’s home country. Mainly the companies are pushed by core competencies and improving their performance of value chain. Direct selling through distributors It is considered to be the most popular option to companies, to develop their own international marketing capability.
This is achieved by charging personnel from the company to give them greater control over their operations. Direct selling also give the company greater control over the marketing function and the opportunity to earn more profits. In other cases where network of sales representative, they company can transfer them exclusive rights to sell in a particular geographic region. A distributor in a foreign country is a merchant who purchases the product from the manufacturer and sells them at profit. Distributors usually carry stock inventory and service the product, and in most cases distributes deals with retailers rather than end-users.
- The size and capabilities of its sales force.
- Its sales record.
- An analysis of its territory.
- Its current product mix.
- Its facilities and equipment.
- Its marketing polices.
- Its customer profit.
- Its promotional strategy.
Direct selling through foreign retailers and end users Exporters can also sell directly to foreign retailers. Usually, products are limited to consumer lines; it can also sell to direct end users. A good way to generate such sales is by printing catalogs or attending trade shows. Direct selling over the Internet
Electronic commerce is an important mean to small and big companies all over the world, to trade internationally. We already can see how important E-commerce is for marketing growth among exporters companies in emerging economies, in order to overcome capital and infrastructure barriers. E-commerce eased engagements, provided faster and cheaper delivery of information, generates quick feedback on new products, improves customer service, accesses a global audience, levels the field of companies, and support electronics data interchange with suppliers and customers. Indirect selling
Indirect exports, is simply selling goods to or through an independent domestic intermediary in their own home county. Then intermediaries export the products to customers foreign markets. Making the export decision Once a company determines it has exportable products, it must still consider other factors, such as the following:
- What does the company want to gain from exporting?
- Is exporting consistent with other company goals?
- What demands will export place on the company's key resources - management and personnel, production capacity, and finance - and how will these demands be met?
Are the expected benefits worth the costs, or would company resources be better used for developing new domestic business?
Exporting to foreign countries poses challenges not found in domestic sales. With domestic sales, manufacturers typically sell to wholesalers or direct to retailer or even direct to consumers. When exporting, manufacturers may have to sell to importers who then in turn sell to wholesalers. Extra layer(s) in the chain of distribution squeezes margins and manufacturers may need to offer lower prices to importers than to domestic wholesalers.
Franchising Why choose franchising? Although many people dream about running their own business, few actually possess the experience or the capital needed to turn that dream into a reality. Franchising however, is a comfortable alternative to running a business entirely on your own. After purchasing a franchise license, you're ready to set up a business for yourself - but not by yourself. What is franchising? The term 'franchising' can describe some very different business arrangements. It is important to understand exactly what you're being offered. Advantages Independence: You are your own boss, the business’ success depends on you and you will spend a big part of your life surrounded by learning children.
- Minimized risk: A team of experienced business people with a vested interest in your success is waiting to guide you through the process: From writing a yearly Business Plan, through choosing the best marketing tactics to defining your commercial goals.
- Brand recognition: Helen Doron Early English is an internationally acknowledged and respected brand, granting you a strong position in the market from day one. Thorough training: Our intensive training courses prepare you with the highest level of organizational, business, administrative and pedagogic know-how.
- On Going support: Even after the first few months, the business team is always there to offer advice and support.
- Educational excellence: Teaching English to children with the Helen Doron Early English method ensures that your students will be fluent speakers and thus have access to better education and professions Disadvantages
- Costs may be higher than you expect. As well as the initial costs of buying the franchise, you pay continuing management service fees and you may have to agree to buy products from the franchisor.
- The franchise agreement usually includes restrictions on how you run the business. You might not be able to make changes to suit your local market.
- The franchisor might go out of business.
- Other franchisees could give the brand a bad reputation.
- You may find it difficult to sell your franchise - you can only sell it to someone approved by the franchisor.
- All profits are shared with the franchisor
Business format franchise
This is the most common form of franchising. A true business format franchise occurs when the owner of a business (the franchisor) grants a licence to another person or business (the franchisee) to use their business idea - often in a specific geographical area. The franchisee sells the franchisor's product or services, trades under the franchisor's trade mark or trade name and benefits from the franchisor's help and support. In return, the franchisee usually pays an initial fee to the franchisor and then a percentage of the sales revenue.
The franchisee owns the outlet they run. But the franchisor keeps control over how products are marketed and sold and how their business idea is used. Well-known businesses that offer franchises of this kind include Prontaprint, Dyno-Rod and McDonald's. Other types of arrangement Different types of sales relationships are also sometimes referred to as franchises.
- Distributorship and dealership - you sell the product but don't usually trade under the franchise name. You have more freedom over how you run the business.
- Agency - you sell goods or services on behalf of the supplier. Licensee - you have a licence giving you the right to make and sell the licensor's product.
There are usually no extra restrictions on how you run your business. Multi-level marketing Some businesses offer franchises that are really multi-level marketing. Self-employed distributors sell goods on a manufacturer's behalf. You get commission on any sales you make, and also on sales made by other distributors you recruit. Be aware that some multi-level marketing schemes may be dishonest or illegal Pizza hut
- Are your core business processes falling through the cracks in a flood of E-mail? Does your small or medium business have to coordinate with people in several other companies and with freelancers?
- Not sure where work is getting stuck in the pipeline?
- Ever forgotten to send or chase up an invoice? It’s a commonplace that business owners should work on their business, not in it.
Businesses need architecting and structuring in the same way as software does, so that they can run without you; the best way to do that is through careful design and automation of the underlying processes. Becoming a member of the New Rich is not just about working smarter.
It’s about building a system to replace yourself. – Tim Ferriss, “The 4-Hour Work Week” The discipline of Business Process Modeling has long been seen as the preserve of enterprises, who invest tens of thousands of dollars and many man-months in building complex installed systems designed to manage thousands of employees. But the same techniques, made much more affordable and simple, are just as important for small and medium businesses, particularly as these companies rely more and more on home workers and get distributed across multiple countries and time-zones.
Process modeling and automation can be affordable and simple, with Rain flow, a cloud based Software-as-a-Service (SaaS) process design and execution platform. Rain Flow allows you quickly build a set of processes that don’t stop at your company’s boundaries! Pretend that your business is going to serve as the model for 5,000 more just like it – Michael E. Gerber, “The E-myth Revisited” Process automation ensures that tasks don’t “fall through the cracks”:
- Import processes from our Pre-defined Process Library, covering a variety of common needs (invoicing, document approval, support etc.
- Import your contacts from G mail or Outlook and create your own Org-Chart
- Customize or create brand new processes using our online graphic Process Design Tool
- Automatically generate documentation for the processes, a great first step towards ISO 9001 compliance
- Low monthly fee – don’t get hammered every time you add a collaborator Investors invest in good systems and people who can build good systems. Investors do not like to invest in businesses where the system, goes home at night. Robert Kiyosaki, “Rich Dad’s Guide to Investing”
- Tasks are automatically assigned to employees, freelancers and even workers in other companies • Customizable E-mail alerts and reminders
- Web-based UI for all participants show their current tasks and processes, wherever they access from
- Managers get an overview of what processes are in operation, where they “get stuck” and how they can be improved Franchising
The franchising can give you a good start into the entry of the business for some people, sometimes entirely new running any business of their own.
All you need to do is to follow the already existing formula with the training, advice and marketing. But, you are still investing some of your life savings. So it is best to do research before you invest and take the advice of experienced professionals. For the franchisors, to be this experienced advice is as least beneficial, for without it, they may have an unsuccessful franchise but they will also put their whole business in a bad position and place their livelihoods, lifesavings and all of their franchisees in danger. Licensing:
An arrangement where by one company allows another company to use its brand name, trade-mark, technology, patent, copyright or other assets in exchange for a royally based on sales. A company may prefer to arrange for a foreign company to manufacture or market its products under a licensing agreement. Factor that may lead to this decision include excessive transportation costs, government regulations and home production costs. ? Licensed a legal document giving official permission to do something. ?
Having been issued with a license by the required authority. License is Aya Ueto’s fourth Japanese solo studio album. ? Freedom to deviate deliberately from normally applicable rules or practice. Securing a patent license or an invention license is hard, frustration and the consuming. The all ration of licensing trade mark for business intention. Appears to be at an all time high mostly in the fashion area, where by customers are buying more licensed products and brand names than ever before. For example: Coca-cola is licensing company. Coca-cola company’s details:
Coca-cola Hellenic was a pioneer foreign investor in Belarus first licensing a local manufacture in 1994 and than setting up its own production facilities in 1997. Its original us $42 million investment was the first green field development in Belarus by a foreign investor. Today, after almost us $ 120 million of investment, Coca-cola Hellanic has four production lines in Belarus producing Coca-cola, Fanta, Sprite, Schweppes, local brand Frunktime. In the summer and over Christmas the lines run 24 hours a day and it employs 550 people in its manufacturing head quarters and across its nation wide sales, warehouse and distribution network.
Because of its early entry to the market, Coca-cola Helenic now has approximately 25% of rapidly growing soft drinks market in Belarus. Coca-cola Hellenic also plays an active role in helping the government improve the business climate in Belarus through its founding member ship of the foreign investment advisory council.
Coca-cola’s task environment: Competitor Pepsi – cola Seven up 8 Inca Kola Strategic Partner Wash vile Coca-cola system evolution Supplier’s Human right alert Covalence SA Coca-cola trading company Customers Coca-cola Global History of Bottling Regulations Government Licensing is leasing a legally protected property like trade marked or copy righted name, logo, likeness, character, phrase or design to another party in combination with a product service or promotion.
It is a process which lays stress on consumer management, development of brand equity in the with international imagery, providing right shopping ambience and perhaps is less about manufacturing.
Advantages of Licensing:
- An invention incentive:-We believe that having a stake in a products actual commercial success unleashes the ultimate incentive for the inventor and results in the best design solutions. A “licensing agreement” accomplishes this by rewarding an inventor with a reasonable royalty for his or her.
- A product head start:- The times and money that a company normally spends on the R & D phase can instead be invested in a products a creative resource and a business ally,
- Fair & balanced :- The royally can very with each product in order to consider such factors as the license’s to be ling, manufacturing and promotional expense. Product Exclusivity: A license can grant to a manufacture exclusive right to make and sell products relating to the license and any associated patents.
- Licensing is often the best bet for an inventory.
- Licensing is less risky for inventory because the license assume all business task
- Less expensive and inventory to spend more time inventing. 7. Less money and offers freedom to live and work any where.
- Very few inventors can retire and their inventory royalties.
- If license invention only receive a small percentage of sales.
- Potential pay of for licensing an invention is much smaller that introduction.
License is a process which lays stress on consumer management, development of brand equity in the international imagery, providing right shopping ambience and perhaps is less about manufacturing. Licensing is away of growing with an already established brand. It provides the brand recall benefit, which are not achievable is case one comes out with a brand new image. There are many types of licensing business like art & design, corporate brands, events, fashion brand, food & drinks. Strategic Alliances
Elmuti and Kathawala (2001) and Wild et al. (2008) explain that a strategic alliance consists of companies who do business together to reach each company’s strategic goals. Wild et al. (2008) state that strategic alliances are similar to joint ventures since they can take place for a short period of time up to several months, depending on the strategic goals. Example 1: Motorola initially found it very difficult to gain access to the Japanese cellular telephone market in the mid-1980s as the firm complained loudly about formal and informal Japanese trade barriers.
The turning point for Motorola came in 1987 when it allied itself with Toshiba to build microprocessor. As part of this deal, Toshiba provided Motorola with marketing help, including some of its best managers. This helped Motorola in the political game of securing government approval to enter Japanese market and getting radio frequencies assigned for its mobile communications systems (Hill, 2006). Example 2: In 2003, Microsoft and Toshiba established an alliance aimed at developing embedded microprocessors that can perform a variety of entertainment functions in an automobile.
The processors will run a version of Microsoft’s Windows CE operating system. Microsoft brings its software engineering skills to the alliance and Toshiba its skills in developing microprocessors (Hill, 2006). Example 3: In 1999, Palm Computer, the leading maker of personal digital assistance entered into an alliance with Sony under which Sony agreed to license and use Palm’s operating system in Sony PDAs. The motivation for the alliance was in part to help establish Palm’s operating system as the industry standard for PDAs, as opposed to a rival Windows based operating system from Microsoft (Hill, 2006).
Elmuti and Kathawala (2001) and Wild et al. (2008) also explain that a strategic alliance can give a company several advantages.
Advantages of Strategic Alliances
- Reduction of costs
- Decreased financial and economic risks
- Getting a glimpse of the other’s competitive advantages such as technology
- Getting access to the other’s market and distribution channel
Disadvantages of Strategic Alliance
The primary disadvantage of strategic alliances is that it can create disagreements between the companies which can create a future competitor (Wild et al. 008).
Joint Venture A joint venture is when two or more firms establish a new firm that is jointly owned, but sometimes one company has a majority share. The main reason to use a joint venture as entry mode is that the companies share the risk and costs amongst them. But there is also the benefit of entering a market with a company from the host country as they have experience of doing business in that specific country. The local alliance partner has a firsthand knowledge of the political and cultural system in the host country.
In some countries, this is the only entry mode possible for companies due to political and legal policies that prohibit foreign ownership (Hill, 2006). Example 1: The Adidas Group and Vulcabras SA have agreed to form a joint venture company with Reebok International Ltd to distribute Reebok footwear, apparel and accessories in Brazil and Paraguay. Financial details were not disclosed, but under the terms of the agreement Pedro Grendene Bartelle will be president and chairman of the new joint venture company, which will be governed by a board of directors to be comprised of Reebok and Vulcabras executives.
The joint venture agreement expires at the end of 2015 (Globe Business Publishing Ltd, 2008). Example 2: Toshiba Storage Device Division has introduced its new DVD ROM, which is the first drive to ship from the new Toshiba Samsung Storage Technology (TSST) joint venture. Headquartered in Japan, the TSST joint venture involves product and business planning, product development, procurement and sales for optical disk-drives, including CD-ROM, CD Recordable, DVD Recordable and DVD-ROM drives. The organization is 51 percent owned by Toshiba and 49 ercent owned by Samsung and has combined annual sales exceeding $1. 8 billion (eMedia Asia Ltd, 2008).
Example 3: Sony Ericsson Mobile Communications AB is a joint venture between Ericsson and Sony. It offers mobile communications products for people who appreciate the possibilities of powerful technology. Established in 2001 by Telefonaktiebolaget LM Ericsson and Sony Corporation, the joint venture continues to build on the success of its two innovative parent companies. Sony Ericsson creates value for its operator customers by bringing new ways of using multimedia communications while mobile.
The company’s management is based in London, and has 4,000 employees across the globe working on research, development, design, sales, marketing, distribution and support Advantages of Joint Venture Wild et al. (2008) state that using a joint venture while entering a country decreases the risk since the exposure is reduced to the parts of the company they have contributed to the joint venture.
Joint ventures can also provide an access to the other partner’s distribution channels. However, Wild et al. (2008) and Osland et al. 2001) further point out that joint ventures can create disagreements between the owners and a loss of control when one owner has knowledge or information that the other lacks. Disadvantages of Joint Venture There are several disadvantages with a joint venture. As in every partnership there is a possibility that friction will occur. It can easily be conflicts in a joint venture in questions of investments and corporate goals. There is also the possibility of a power struggle in order to gain control.
Joint venture also has some disadvantages similar to licensing as it can reduce the ability to achieve experience curve economies and location advantages. The risk of losing control of the company’s specific assets such as technological know-how may also occur (Hill, 2006). Foreign Direct Investment: Foreign direct investment occurs when a firm headquartered in one country builds or purchases operating facilities or subsidiaries in a foreign country. The foreign operations then become wholly owned subsidiaries of the firm. For example, Ford’s acquisition of Jaguar, Volvo and Kia.
Dell Computer’s new factory in china is a direct investment. A major reason many firms make foreign direct investments is to capitalize on lower labor costs. In other words, the goal is often to transfer production to locations where labor is cheap. Japanese businesses have moved much of their production to Thailand because labor costs are much lower there than in Japan. There are two strategies used in foreign direct investment. 1. Brownfield 2. Greenfield Brownfield Investment: When a company or government entity purchases or leases existing production facilities to launch a new production activity.
For example, BANGLALINK Banglalink: Banglalink is the second largest cellular service provider in Bangladesh after Grameenphone. In September 2004, Orascom Telecom holding purchase 100% of the share of Sheba Telecom (Pvt. ) Ltd. Sheba had a base of 59000 users, of whom 49000 were regular when it was sold. Afterward it was re-branded and launched its service under the Banglalink brand on February 10, 2005. The task environments of Banglalink are: Competitors: · Grameen · Aktel · Warid · Citycell · Teletalk Customers: · Individual consumers · Institutional customers
Suppliers: · Siemens · Wholesale parts processors · Packaging manufacturers Strategic partners: · BTRC · Nokia-Siemens · Network Regulators: · BRTC · Securities and Exchange commission · Police department Greenfield Investment: A Greenfield investment is the investment in a manufacturing, office, or other physical company related structure or group of structures in an area where no previous facilities exist. Greenfield investing is usually offered as an alternative to another form of investment such as merger and acquisition, joint venture or licensing agreement.
Greenfield investing is often mentioned in the context of Foreign Direct Investment. For example: Warid Telecom Warid Telecom: Warid Telecom International Ltd. is a GSM based cellular operator in Bangladesh. Warid was the sixth mobile phone carrier to enter the Bangladesh market and launched commercial operation on May 10, 2007. Warid telecom international LLC an Abu Dhabi based consortium, sold a majority 70% stake in the company to Indian’s Bharti Airtel Ltd. for US $300 million.
The task environments of Warid are:
- Grameen Aktel
- Individual consumers
- Institutional customers
- Wholesale parts processors
- Packaging manufacturers
- Securities and Exchange commission
- Police department
Like the other approaches for increasing a firm’s level of internationalization, direct investment carries with it a number of advantages and disadvantages. They are discussed below: Advantages of foreign direct investment:
Enhanced control: In foreign direct investment managerial control is more complete and profits do not have to be shared as they do in joint ventures. Existing infrastructure: Existing infrastructure is another advantage of foreign direct investment. Purchasing an existing organization provides additional benefits is that the human resources and organizational infrastructure are already in place. Consume the cost of introducing a new brand: Acquisition is also a way to purchase the brand name identification of a product.
This could be particularly important if the cost of introducing a new brand is high. Disadvantages of foreign direct investment: Complexity: Complexity is one of the disadvantages of foreign direct investment. In decision making it creates great complexity. Greater economic and political risk: In this approach, a firm starts business in foreign country in greater economic and political risk. Greater uncertainty: Foreign direct investments have some advantage but the firm work in greater uncertainty. Management Contract
Wild et al. (2008) explain that a management indenture is when one business gives another managerial expertise. The authors further point out that management contracts are often used by the public sector moreover. This entry mode is not used on a one time basis but rather during an extended time period. There are several advantages to gain by using management contracts as an entry mode, for example international business opportunities can arise and there may be an increase of expertise of local workers.
This entry mode reduces the exposure and risk of losing physical assets, however the employees may still be exposed to risks and management contracts can create a future competitor in the local market. Conclusion From the above discussion following conclusion can be drawn: • In accordance with the view of (Hill, 2006) managers of international businesses need to remember that foreign assembly can improve their capabilities over time, and this can be of immense strategic benefit to the firm.
Rather than viewing foreign assembly process as sweatshops where unskilled labor churns out low cost goods, manager need to view them as otential centers of excellence and to encourage and foster attempts by local managers to upgrade the capabilities of their factories and thereby, foreign assembly can serve as a source of competitive advantage. And the various case studies discussed in the easy supports this statement.
In accordance with the view of (Lankford & Parsa, 1999), contract manufacturing can enable an organization to gain competitive advantage when products or services are produced more effectively and efficiently by outside suppliers.
The advantages in contract manufacturing can be operational, strategic, or both. Operational advantages usually provide for short-term trouble avoidance, while strategic advantages offer long-term contributions in maximizing opportunities. However, suggestions of (Harland et al. 2005) cannot be underestimated who suggested that the failure to manage outsourcing relationships properly, perhaps through service level agreements, may reduce customer service, levels of control and contact with the international customers and suppliers.
Finally, it may be mentioned that it is appropriate to use contract manufacturing or foreign assembly within an international marketing strategy when risk factors are identified and dealt with precision and careful strategic analysis. Appropriateness of embedding contract manufacturing and foreign assembly within an international marketing strategy depends of how precisely an organization can manage multiple relationships in different environmental context and gain competitive advantage.
The main goal of foreign manufacturing and foreign assembly process is to increase and sustain the organizational competency. As stated in the discussion that the rationale behind establishing a foreign manufacturing facility, the strategic role of foreign factories can evolve over time and success of such strategy depends on the organization’s ability to respond in the ever changing global environment.
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