Modes of Entry & BARRIERS

8/8/2019 Modes of Entry & BARRIERS

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INTERNATIONAL MODES OF

ENTRY AND BARRIERS

By:

Ishmeet Kaur

01611403909

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International Market Analysis

FOREIGN MARKET ANALYSIS:The firms have alternative foreign markets to enter.In order to achieve its goals successfully, the firmhave to:

Analyse Alternative foreign markets- Current & potential size of alternative markets Level of competition Legal and Political environment Socio-cultural environment Purchasing power

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Motivation for International Expansion

PROACTIVE (pulled by good foreign markets)

Firm specific advantage

Resource availability Economies of scale

Eg. Bharti Airtel

REACTIVE (pushed by bad domestic markets)

Domestic competition Poor domestic market

Follow customers

Eg. Diamond & jewellry industry

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Factors affecting mode of entry Need for control (desire to reduce uncertainty and

maintain full control over the foreign operation)

Resource availability (lack of access to financial capitalmay mean that entry by ownership is impossible so thatnon-equity or partial equity modes are preferable; mostlikely for small firms)

Global strategy (global integration vs. nationalresponsiveness)

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Modes of Entry1. Exporting

2. Licensing3. Franchising

4. Foreign Direct Investment

5. Wholly Owned Subsidiaries6. Mergers

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1. ExportingIn national accounts "export consist of transactions

in goods and services (sales, barter, gifts or grants)from residents to non-residents.

Export of goods

-Change in ownership from a resident to a non-resident.

In legal terms change takes place

In legal terms, no change takes placeEg. cross border deliveries between affiliates of the sameenterprise

goods crossing the border for significant processing toorder or repair

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Contd Export of services

services rendered by residents to non-

residents

direct purchases by non-residents in theeconomic territory of a country

Eg. all expenditure by foreign tourists in the economicterritory of India is considered as part of the exportsof services India

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Exporting INDIRECT EXPORTING: exporting to destination

through an intermediary. Eg. India expots sugar toPakistan through Singapore and Dubai

DIRECT EXPORTING: is selling the products in aforeign country directly through its distributionarrangement or through a host countrys company.

INTRACORPORATE TRANSFER: are selling of products by a company to its affiliation company inhost country (or another country). Eg. HLL in Indiato UNILEVER in USA

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How to start export business Identifying Products For Export

Market Selection

SWOT Analysis

Registration of Exporters with RBI, DGFT,Export Promotion Council, Income Tax

Authorities and commodity boards Export License

Export Pricing And Costing

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Contd Understanding Foreign Exchange Rates

Export Risks Management Packaging And Labeling Of Goods

Inspection Certificates And Quality

Control Custom Procedure For Export

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Advantages

low financial cost (but have start up costs)

risk limited to value of exports

can enter foreign market gradually (ease ofstart up, less chance of mistakes, gainexperience)

gain information about and expertise inforeign market

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Disadvantages

Difficulty in identifying customer needs

Potential problems with local distributors

Logistical considerations(costs of warehousing,

transport, distribution, longer supply lines,difficulties in communication)

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2. LICENSING

In this mode of entry, the domestic manufacturer

leases the right to use its intellectual property i.e.technology, copy rights, brand name etc to amanufacturer in a foreign country for a fee.

Eg. Philips has entered into a brand licensingagreement with Videocon under which it will assumethe responsibility of selling and after sale services ofPhilips consumer television set in India, for 5 yrs.

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Cross-Licensing Agreement

A firm might license some valuable intangibleproperty to a foreign partner, but in addition to aroyalty payment, the firm might also request that theforeign partner license some of its valuable know-how to the firm.

Eg. NSEhas enabled Indian investors to access US

Capital market and vice-versa through a cross-licensing agreement, on 10 March, 2010

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Advantages Low investment on the part of licensor.

Low financial risk to the licensor Licensee gets the benefits with less

investment on research anddevelopment

Licensee escapes himself from the riskof product failure.

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Disadvantages It reduces market opportunities for both the parties

have to maintain the product quality and promote the

product

Chance for leakages of the trade secrets of thelicensor.

Licensee may sell the product outside the agreedterritory and after the expiry of the contract.

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3.FRANCHISING:

Under franchising an independent organization calledthe franchisee operates the business under the nameof another company called the franchisor.

Under this agreement the franchisee pays a fee tothe franchisor.

Eg. Italian designer goods maker Gucci entered the

Indian retail market through its Indian franchiseeLuxury Goods Retail.

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Advantages Franchisor can get the information regarding the

market culture, customs and environment of the host

country.

Franchisor learns more from the experience of thefranchisees.

Franchisee get the benefits of R& D with low cost.

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Disadvantages It may be more complicating than domestic

franchising.

It is difficult to control the internationalfranchisee.

There is a problem of leakage of tradesecrets.

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4.FOREIGNDIRECTINVESTMENT

Direct ownership of facilities in the target country. Itinvolves the transfer of resources including capital,

technology, and personnel.

Direct foreign investment may be made through theacquisition of an existing entity or the establishmentof a new enterprise.

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Methods ofFDI Greenfield entry (start from scratch, with

clean slate) Eg. UK's United Biscuits made

India entry Brownfield entry (acquisition of existing

firm)Eg. M&M acquired Korean companycalled Ssangyong

Joint venture (go with a partner) Eg. BhartiAirtel-Singapore Telecom

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WhollyOwnedSubsidiariesA wholly owned subsidiary is the most costly method of

serving a foreign market. Companies taking thisapproach have to bear the full costs and risksassociated with setting up overseas operations.

A subsidiary whose parent company owns 100% of itscommon stock.

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Mergers A merger is a combination of two companies

to form a new company

Eg. The formation of Brook Bond Lipton IndiaLtd. t hrough the merger of Lipton India andBrook Bond.

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SPECIALIZED ENTRY MODES

ManagementContract:

One firm provides managerial assistance, technicaladvice or specialized services to another firm for anagreed time period in return for a fee (flat fee orpercent of revenues).

Turnkey Project:

One firm (or firms) agrees to fully design, construct

and equip a facility and then turn the key over to thepurchaser when the plant is ready for operation. Maybe a fixed price or a cost plus contract. Often donewith large construction projects in developingcountries.

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Barriers To Trade

Barriers

TariffNon TariffVoluntaryConstraint

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TARIFF BARRIERS Levy collected on goods when they enter a domestic

tariff area through customs.

The term tariff refers to the duties imposed oninternationally traded commodities when theycross national boundaries.

Tariffs enhance the price of imported goods.

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Classification Of TariffBarriers Basis of origin & destination of goods.

Basis of quantification of tariff.

Basis of the purpose they serve.

Basis of trade relation.

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Basisoforigin &

destinationofgoods Export Duty

Import Duty

Transit Duty

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Basis of quantification of tariff Specific Duty

Ad-Valorem

Compound duty

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Basis of the purpose they

serve Revenue tariff

Protective tariff

Anti-dumping duty

Countervailing duty

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Basis of trade relation

Single column tariff

Double column tariff

Triple column tariff

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Benefits of tariff to home

countries Imports Discouraged

Protection to home industries.

Low consumption of foreign goods

Revenues & employment opportunities

Reduces deficit

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Non-Tariff Trade Barriers

Non-tariff barrierstotrade aretrade barriers that restrict imports but

are not in the usual form of a tariff.

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Non TariffBarriers Quota System

Domestic Content Requirements

Import Licenses

Import State Trading Enterprises

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THANK YOU

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Modes of Entry & BARRIERS

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