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Exporting Through Own Marketing Facilities Abroad Economics Essay
The internationalization of business is a widely observed phenomenon today. More and more firms are seeking business outside their national boundaries. In its effort to go international, a firm often grows through various successive stages.
Internationalization of Firms
The internationalization process of a firm can be visualized as a series of successive stages of development. A purely domestic firm graduates to a multinational enterprise stage through the following stages:
This classification of successive stages focuses only on the distribution aspect of marketing and, therefore, does not provide a complete picture. More specifically, while it does describe correctly, though incompletely, the growth stages, it does not explain the behavior of the firms.
Corporate Life Cycle Theory
A more perceptive theory explaining the evolutionary processes through which a company passes has been termed as ——corporate life cycle in international marketing'. The stage of a company in the evolutionary cycle can be determined by the degree of commitment it has towards export markets. The stages in the evolutionary cycle are:
Stage 1 Opportunism
Stage 2 Limited Commitments
Stage 3 Limited Fixed Investment for Exports
Stage 4 Substantial Dependence on Exports
Stage 5 Equal Treatments of Domestic and Export Business.
In the first stage, the attitude is essentially reactive; there may be some excess capacity at a point of time. If there are overseas enquiries, the firm takes advantage of it and exports. In stage 2, the firm discovers that exports can be a profitable long-term supplement to domestic business and decides to earmark a certain proportion of total production for the export market. Export business thus becomes a part of the corporate planning process. In the third stage, the firm gets sufficiently emboldened to invest specially for export production, i.e. it creates additional production capacity.
In the next stage, the extent of export business increases in quantitative terms. In the final stage, the distinction between domestic and export business ceases to exist and the firm becomes global.
Alternative Methods of Entry
When a Company is unwilling to take any risks for the sake of international business, it sometimes opts for licensing as the mode of entry. Licensing is, simply put, nothing but entering into a contract to allow another firm to use an intellectual property, such as, patent or a trade mark. This definition clearly brings out the fact that as an entry mode, this option is not available to all firms. Only those which have saleable technology, know-how, can use the licensing route.
The attraction of licensing lies in the fact that it involves no investment and very little up-front expenditures. And if successful, it can generate a fairly high rate of return.
Under a licensing agreement, the holder of the knowledge (technology or know-how) transfers the same to the buyer for his use against the payment of. Fixed amounts, which can either, be a one-time lump-sum payment or a percentage of sales, or a combination of the two.
Licensing arrangements suffer from several disadvantages from the standpoint of the licensor. First, the licensor does not have any management control over the licensee and is therefore unable to control either the quality or price. An unscrupulous or inefficient licensee can therefore cause damage to the long-term development of the market potential. Second, licensing is extremely limited in its scope. The licensor cannot have a share of the returns from the manufacturing and marketing operations of the licensee. Third, the life of the successful licensing arrangements is normally short, as the licensee may develop his own manufacturing capability within a reasonable short period. But the most dangerous aspect of the licensing arrangement is that sometimes the licensees, after they internalize the technology and also in some cases improves upon it, turn into competitors of the licensors.
A similar method of entry is franchising which is globally very common in the food, soft drinks and fast food business. Franchising is a form of marketing, under which the parent company allows the franchisee to use its methods, symbols, trademarks and architecture. The contract will specify the place of operation of the franchisee and the period for which the arrangement will remain valid. Several forms of franchising are in operation. One form is hundred per cent franchisee ownership; the second form envisages a concept of area or master franchisee who in turn can appoint sub-franchisee(s). The third is where the franchise is in fact owned by the parent firm itself. This happens essentially at the market-testing stage. The principal wants initially to find out the market potential himself before deciding whether large scale franchising will be profitable.
The basic advantage of this entry method is akin to that of licensing. The upfront expenditure is minimal while the return can be substantial. The disadvantage lies in the fact that unless strict monitoring is done, franchisees may default on quality and delivery, thus affecting the reputation of the principal.
International Joint Ventures
International joint venture involves creation of a separate legal entity by an association of two or more firms. Normally, one of the partners will be a local firm though it is not necessarily so. The choice of this entry method is dictated by several important considerations. First, it reduces the cost of entry because the equity will be divided between/among the partners. The foreign firm can thus make an entry into a market even with a minority participation and still can have substantial management control. Second, having a local partner can reduce the political risks. In an environment which may not be friendly to foreign investors, having a local partner can help in creating a more acceptable public perception. Third, the local partner is expected to have a good grasp of local operating conditions and therefore can be of great help to the foreign firm which is unaware of these details.
While these advantages can be substantial, the biggest danger of international joint venture lies in the inappropriate selection of a partner. If the choice is proper the strength of the parties will be complementary. But if the choice is wrong, either in terms of operative attributes or management cultures, the joint ventures are bound to break up. Several surveys have shown a considerable ‘divorce’ rate among the joint venture partners or taking over of the businesses by the dominant partners.
The choice of the joint ventures as the entry mode may, however, is dictated by the host country’s regulations. Some countries stipulate that foreign firms can set up facilities only in association with local firms.
Subsidiaries and Acquisitions
Wholly owned subsidiaries have been the preferred entry mode for large enterprises. The advantages of complete ownership are: avoidance of conflict of interest, as may happen in the case of joint venture, and fullest exploitation of the market potential in terms of both manufacturing and marketing. But these advantages are to be evaluated against the large scale commitment of financial and managerial resources. Some firms which are anxious to keep their competitive edge under the strictest control normally favor this entry mode. Examples are IBM and Coca Cola. But the recent attempts of these firms to enter the Indian market reveal that such firms may opt for any other mode, such as, joint ventures, if that facilitates the process of entry.
Acquisitions can be considered as the entry mode if ‘greenfield’ projects are time consuming, especially when the corporate strategy dictates an earlier entry in the market. The success of acquisition mode is strictly dependent upon the parent firm’s ability to integrate the acquisition in its organizational framework. There are several instances where the present firm failed miserably and had to sell the acquired firm later at a considerable loss.
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