modes of entering into international business with limitations and advantages
Saumya,
Following are the modes of international business with its limitations and advantages:
1) Exporting and Importing : Purchase and sales of goods and services from/to foreign countries.
Advantages- a) This is the most easiest mode of entering into the international business.
b) Less investment is required by business organisations in terms of money and time.
Disadvantages- a) In this mode, since goods are physically exchanged between different countries, additional costs in terms of insurance, transportation occurred.
b) If foreign country has import restrictions, then exporting and importing mode will not be a suitable option.
2) Contract Manufacturing : Outsourcing manufacture of specialised, innovative and technically advanced components of goods to local manufacturers in foreign countries.
Advantages- a) This mode allows the international firms to not to make fresh investment in production facilities and receive the products or goods manufactured in ample amount.
b) Since international firms do not make investment or make a very little investment in foreign countries, risk is also less in the foreign countries.
Disadvantages- a) They feel difficulty in adhering to international quality standards in the sense that they might fail to produce goods as per the international quality and standards.
b) They lack freedom over decision-making process.
3) Licensing and Franchising : Licensing involves granting of patents rights by firms in home countries to firms in foreign countries in return of royalty. On the other hand, franchising involves strict adherence to the rules as to how the franchisees are operating in similar lines to that of the franchiser.
Advantages- a) With the terms and conditions of the agreement of licensing and franchising, only registered parties can make a legal use of the licensor's/franchiser's patents, copyrights and trademarks and the remaining firms operating in the foreign market are not allowed to make use of the same.
b) The licensee/franchisee who makes use of the technology of licensor has more knowledge and access to the local market which helps the licensor/franchiser to fruitfully complete its marketing activities.
Disadvantages- a) When the licensee/franchisee gain complete knowledge about the production and marketing of products that have been licensed/franchised, he may start selling the similar product leads to competition for licensor/franchisor.
b) Quarrels among the licensee/franchisee and licensor/franchisor may develop on account of the royalty payments, accounts maintenance etc.
4) Joint Venture : Collaborating with foreign firms for the accomplishment of pre-decided objectives for a specified time period.
Advantages- a) Joint venture creates a possibility of executing the specific projects that require more investment in terms of human and physical capital.
b) A high degree of risk and cost is involved when a firm take decision to enter in foreign countries. But with Joint venture, such risks and costs can be shared.
Disadvantages- a) One major disadvantage of a joint venture is that the ownership of a joint venture is joint. This in turn limits the control and the return that each firm can enjoy.
b) The objectives of a joint venture are often not 100 per cent clear and communicated to everyone involved.
5) Wholly Owned Subsidiaries : Establishment of sister concern companies abroad by purchasing 100 per cent shares of foreign companies.
Advantages- Parent company has full control on its activities in foreign countries.
b) The parent company is not supposed to disclose about its secrets of trade, technology used by it.
Disadvantages- a) Since 100 percent investment is required by the parent company, this mode should not be opted by small and medium sized firms because of lack of funds.
b) If the foreign operations faces failure, all the risk and losses are to be faced by parent company alone.
Following are the modes of international business with its limitations and advantages:
1) Exporting and Importing : Purchase and sales of goods and services from/to foreign countries.
Advantages- a) This is the most easiest mode of entering into the international business.
b) Less investment is required by business organisations in terms of money and time.
Disadvantages- a) In this mode, since goods are physically exchanged between different countries, additional costs in terms of insurance, transportation occurred.
b) If foreign country has import restrictions, then exporting and importing mode will not be a suitable option.
2) Contract Manufacturing : Outsourcing manufacture of specialised, innovative and technically advanced components of goods to local manufacturers in foreign countries.
Advantages- a) This mode allows the international firms to not to make fresh investment in production facilities and receive the products or goods manufactured in ample amount.
b) Since international firms do not make investment or make a very little investment in foreign countries, risk is also less in the foreign countries.
Disadvantages- a) They feel difficulty in adhering to international quality standards in the sense that they might fail to produce goods as per the international quality and standards.
b) They lack freedom over decision-making process.
3) Licensing and Franchising : Licensing involves granting of patents rights by firms in home countries to firms in foreign countries in return of royalty. On the other hand, franchising involves strict adherence to the rules as to how the franchisees are operating in similar lines to that of the franchiser.
Advantages- a) With the terms and conditions of the agreement of licensing and franchising, only registered parties can make a legal use of the licensor's/franchiser's patents, copyrights and trademarks and the remaining firms operating in the foreign market are not allowed to make use of the same.
b) The licensee/franchisee who makes use of the technology of licensor has more knowledge and access to the local market which helps the licensor/franchiser to fruitfully complete its marketing activities.
Disadvantages- a) When the licensee/franchisee gain complete knowledge about the production and marketing of products that have been licensed/franchised, he may start selling the similar product leads to competition for licensor/franchisor.
b) Quarrels among the licensee/franchisee and licensor/franchisor may develop on account of the royalty payments, accounts maintenance etc.
4) Joint Venture : Collaborating with foreign firms for the accomplishment of pre-decided objectives for a specified time period.
Advantages- a) Joint venture creates a possibility of executing the specific projects that require more investment in terms of human and physical capital.
b) A high degree of risk and cost is involved when a firm take decision to enter in foreign countries. But with Joint venture, such risks and costs can be shared.
Disadvantages- a) One major disadvantage of a joint venture is that the ownership of a joint venture is joint. This in turn limits the control and the return that each firm can enjoy.
b) The objectives of a joint venture are often not 100 per cent clear and communicated to everyone involved.
5) Wholly Owned Subsidiaries : Establishment of sister concern companies abroad by purchasing 100 per cent shares of foreign companies.
Advantages- Parent company has full control on its activities in foreign countries.
b) The parent company is not supposed to disclose about its secrets of trade, technology used by it.
Disadvantages- a) Since 100 percent investment is required by the parent company, this mode should not be opted by small and medium sized firms because of lack of funds.
b) If the foreign operations faces failure, all the risk and losses are to be faced by parent company alone.