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Various forms of internationalisation
Numerous market entry modes are available for an enterprise, aspiring to internationalise into foreign markets. Entry forms ranges from Exporting, Licensing, Franchising, strategic alliances, joint ventures and wholly owned subsidiaries to foreign direct and indirect investments. However these modes have their own benefits as well as risks attached. The forms of internationalisation discussed here are, exporting, licensing, joint venture and Foreign Direct Investment (FDI).
Forms of Internationalisation
Internationalisation has been defined as “the process of adapting firm's operations to international environments" (Calof and Beamish, 1995, p-116). In other words, it can be explained as involvement of enterprises in to international markets (Welch and Luostarinen, 1999). The existence of internationalisation can be traced back from the initiation of mankind's aptitude to travel overseas in search of different commodities as well as searching new markets for selling products. However today commercial world has taken a massive form and internationalisation has become a spine of modern commercial world (Vijayasri, 2013). The most obvious intention is to target new markets for achieving growth in the business. Enterprises broaden the market for exporting or joint ventures overseas. Several enterprises go overseas to get access to skills and technical know-how.
Conventionally, internationalisation by exporting has been regarded as a way to increase growth of firms. However today, internationalisation involves all the activities that a business embarks on with regards to foreign markets for instance, exporting goods and services, licensing, amalgamating with an already existed business, entering in to a joint venture with a foreign company, exhibiting in international trade shows, investing in a foreign country in direct (foreign direct investments) or indirect way (foreign indirect investment or portfolio investment) (Mohibul and Fernandez, 2008).
Selling goods and services manufactured in the home country to other markets is defined as exporting (Joshi, 2005). Traditionally it has been considered as the first and foremost move in to an international market which serves as an entry point for expansion in the future (Kogut & Chang, 1996). Although it is considered as an entry strategy, all the sizes of enterprises consider exporting regardless of their position in internationalisation process. Exports benefit the business as it gives the scope for specialisation in the production of those goods and services which it is best suited to produce given the resources in one's own country (natural endowments, labour, skills and technical know-how etc). The key benefit of exporting is that the business can enter as well as exit from the foreign market much easily compared to the complex and resource-seeking forms of internationalisation such as joint venture or foreign direct investment. In other words, there is a less risk, expense and resources involved with exporting compared to other strategies and so it can be executed frequently (Dalli, 1995).
Exporting can be broadly divided in to two categories, direct exporting and indirect exporting (Daniels, Radebaugh and Sullivan, 2007). Direct exporting means direct marketing and selling to the client situated in the foreign market. In a condition where the enterprise has an accessible market in the foreign country, direct exporting can be a viable option as there are several advantages such as sales are controlled, target management is easier, higher profits because of absence of mediators and a closer relationship with the ultimate buyers. However when there is a less familiar environment, risk of exchange rate deterioration and complex regulatory and legal system, makes direct exporting dicey. In that case indirect exporting is a more feasible option (Johanson2000). Indirect exporting make use of mediators to export in to the foreign countries, who then takes charge of searching for buyers, shipping and payments. The examples of such exporting are generally found in automobiles and transportation industries. However indirect exports can tend to diminishing returns as the mediators try to gain the maximum profit as well as the control over the international market is more or less in the hands of the mediators. Many organisations use both the approaches for different countries.
A most celebrated advantage of exports is that it eliminates the cost of producing in the host country. However it can also be taken as a disadvantage if the cost of producing the good is less overseas. From nation to nation there are different rules and regulations pertaining to exports and imports to protect the domestic market such as tariff barrier and import ceilings which make exporting expensive (Hill, 2007). These pitfalls of exporting can be dropped if the exporter hires an experienced mediator (a company or a consultant) and adopts the appropriate strategy.
Licensing is an agreement between two parties in which the licensor permits the right over intangible property to licensee for a specific period, and in return, the former collects a loyalty fee from the licensee (Hill, 2007). In other words it is a mode of foreign market entry where an enterprise of one country permits an enterprise in another country to utilise the manufacturing and processing techniques, skills, trademarks, patents etc provided by the licensor. This is a non-equity based transaction. This type of internationalisation is frequent in pharmaceutical companies where licensing for formulas, inventions and patents are exchanged. Beverage manufacturers also frequently license the bottling companies of other countries for producing the beverages. This particular mode of internationalisation is suitable for firms that lack capital for production and familiarity with local markets in foreign country. It can be also recognised as low risk manufacturing relationship (Susman, 2007). However there are some limitations of this mode as well. Licensing controls the enterprise's scope to synchronize strategic moves across the foreign markets by which profits earned in one country (Hill, 2007). Other disadvantages of licensing agreement are the limited control over manufacturing, strategy used for marketing and development and sale of the product. Selling the technical skills to the other businesses evolves a risk of creating competition by providing them the competitive advantage one's own business possesses (Carstairs and Welch, 1982).
As the name suggest, a joint venture is an entity created by two or more independent businesses working together with an idea of achieving a common objective, or combining their respective know-how and resources for a superior mutual benefit. Under this mode of internationalisation, the initiating partners (of different countries) create a new entity, participate actively in formulating approaches and decisions making. The enterprises venture to link together sharing profits and expenses, as well as the control of the new firm (Mohibul and Fernandez, 2008). It is equity based method of internationalisation although the combination of equity proportion depends on the agreements of the companies involved in it. The agreement between the parties states the task and kind of participation each company would perform. There are examples of joint venture occurring between businesses that are engaged in a manufacturing of similar products and make profits in similar manner. For the purpose of saving the cost of research and development of new technologies, the two market competitors Isuzu (Japan based) and General Motors (USA based) have engaged themselves in joint ventures (Automotive News, 2014). The other kind of joint venture takes place between companies which manufacture different products but technologically linked to each other for an instance, the joint product of mobile phones by Sony (Japanese electronics manufacturer) and Ericsson (Swiss telecommunication company). A joint venture can be project based or for a long-term business relationship.
Joint ventures can be a beneficial business as enterprises can complement each other's skills and can benefit from the international presence. A company entering in to a joint venture gains from local partner's knowledge of the host country's competitive conditions, culture, language as well as political and business systems. The companies involved have a joint financial strength and increased access to various resources. Another big advantage is that the costs and risks are shared and all the involved parties would try to minimise them. A business can also overcome some of the cost and risk by offering control of its equity to the other companies involved. In joint venture there is a secured access to other company's technology which can give the market protection. Also there is accumulative learning because of technology and strategies sharing. However, there are certain drawbacks of this mode of internationalisation as well. The first and foremost limitation is that setting up a joint venture can augment a company's exposure to risk than what it would be in a more simple relationship model of paying for the job done by another party. This augmented exposure to risk arises as all the companies are partial equity holder of the venture and there is a greater chance of having a conflict of interests (Hill, 2007).
Foreign Direct Investment (FDI)
The World Bank defines FDI as “Foreign direct investment are the net inflows of investment to acquire a lasting management interest (10 per cent or more of voting stock) in an enterprise operating in an economy other than that of the investor. It is the sum of the equity capital, reinvestment of earnings, other long-term capital, and short-term capital as shown in the balance of payments" In other words. FDI is an investment and getting a controlling ownership in a business by an investor, based in another country for which the foreign investor has control over the company purchased. FDI is different to portfolio investment that is, a passive investments in the share and stocks of a company based in a foreign country which is also called Foreign Indirect Investment (FII). FDI refers to an enterprise's physical investment (in land, building, equipment etc.) in establishing a plant in a foreign country. Enterprises that involve in FDI are often called Multi National Enterprises (MNEs) or Multi National Companies (MNCs). MNEs usually have two approaches either investing in a new company which are called green field investments or purchasing an existing foreign company by a joint venture or strategic alliance, which is called brown field investment. In addition to the direct capital financing it supplies, FDI can bring valuable technology and know- how. It also encourages linkages with local firms which can help jumpstart an economy as well (Alfaro, 2003).
The determinants of FDI can be broadly listed as market size, labour costs and productivity, foreign exchange ratio, political risk, economic policy of the host country, availability of infrastructure, availability of human capital and natural resources, economic growth and tax structure of the host country and saturation at home market (Demirhan and Masca, 2008).
Many a times the benefits and limitations of FDI become a subjective matter. This type of internationalisation may provide a MNC with great advantages but at the same time it cannot be advantageous to the host country. Observing from the business point of view, FDI has a direct access in to the host country's market. Some countries have restrictive trade policies; FDI nullifies this for the investor. In a similar manner FDI is effective mode to acquire scarce natural resources in the foreign country for example oil companies make massive investments in oil rich countries. MNCs benefit tremendously by moving their operations in to a developing country with access to cheap labour, availability of human capital and overall cheap factors of production. The reduced cost of production gives a competitive edge to the business in the international market. Often MNEs selects a particular country for production or assembling as it is closer to final market for their products and by doing so transport and distribution cost can be reduced. Many governments invite and give incentives for the FDIs which are beneficial for the companies which are trying to get hold of an international market. The major demerit of internationalisation through FDI is that, it is highly capital intensive and so there is a higher risk associated with it. For a small and medium scale enterprise FDI can become inaccessible (Westhead,Wright and Ucbasaran, 2007). Further, the exchange rate and political turbulence can adversely affect the FDI business.
An enterprise seeking to enter in an international market must make a strategic decision on the selection of the mode of internationalisation. Above discussed four forms are the most common modes; however the risk appetite of the business is the best indicator to select one or more from them. Indirect export can have minimum risk while FDI can have the maximum risk for an international entry however returns are also set in the same fashion.
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