Globalization, Regional Integration, Pros And Cons Of Globalization And How To Enter Foreign Markets 4u2c34
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Learning outcomes: • Acquaint yourself with the concept of globalization. • Understand the advantages and disadvantages of globalization.
• To know how to enter the foreign markets. Introduction to the lecture: Before studying this chapter please go through the first chapter of introduction of international business which also talks about the meaning of globalization at length and how it effects the economy and working of business in a particular country and the world as a whole. This chapter is just an extension of that chapter. Pros and cons of globalisation While globalisation has several benefits, it has a number of problems. While developing countries which, in the past, where against globalisation, have wide opened their doors for globalisation, many people in developed like USA are angry against globalisation. American jobs and wage levels are severely affected by the influx of cheap imports and shifting of production to low cost overseas locations. According to a business week/ Harries poll in early 2000, more than two-thirds of American believe that globalisation drags down U S wages. A strong majority of the American feels that trade policies have not adequately addressed the concerns of American workers, international labour standards, or the environment. The important pros and cons of globalisation according to the above survey ate the following. Productivity grows more quickly when countries produce goods and services in which they have comparative advantage. Living standards can go up faster. Global competition and imports keep a lid in prices, so inflation is less likely to derail economic growth. An open economy spurs innovation with fresh ideas from abroad. Export jobs often pay more than other jobs. Unfettered capital flows give the US access to foreign investment and jeep interest rated low. The adverse effects of globalisation according to the survey are: Millions of America have lost jobs due to imports or production shifts abroad. Most find new jobs that pay less. Millions of others fear losing their jobs, especially at those companies operating under competitive pressure. Workers face pay cut demands from employers, which often threaten to export jobs. Service and white collar jobs are increasingly vulnerable to operations moving offshore. U S employees can lose their comparative advantage when companies build advanced factories in low-wage countries, making them as productive as those at home. 11.154
True, globalisation can benefit the developing countries in several ways. It is, however, apprehended that unregulated globalisation will cause serious problems for developing countries. The almost universal acceptance of the market economy and the globalisation driven by private enterprise tend to aggravate most of the harmful effects traditionally attributed to neocolonialism. The global dominance of industries by MNCs is on the increase. Many countries are indiscriminate in liberalizing foreign investment. Pepsi, Coke and “junk foods” are allowed even in countries like China. A number of countries allow high foreign stake even in industries where that is not really required. This could affect domestic enterprise of developing countries. There have been a large number of cases of takeover of national firms by foreign firms. In some of these cases, the domestic firms are driven to a situation of a situation of having to hand over the majority or complete equity to the foreign partners of t ventures because or the inability of the Indian partners to bring in additional capital or some other incapability. Replacement of traditional and indigenous products by modern product, resulting in the ruin of traditional crafts and industries and the livelihood of people in these sectors have also been happening in several countries. One common criticism has been that the technology that the MNCs bring in may not be the one suited to the liberalized environment of today, another problem, viz., the dumping of outmoded technology to the developing world is not as valid today as in the past and in future it is likely to be even less valid. In the past, because of the entry restrictions and resultant absence or lack of competition, developing countries could be used as a dumping ground for obsolete products, including technology. The business environment today, however, is vastly different. Because of the competition between MNCs (and national firms) made possible by the dismantling of entry barriers (and freeing of technology imports by national firms and added thrust on R&D by them) technological edge is an important determinant of success. The evolution of the motorcar market in India, for example, gives come indication of this. In a competitive environment, a firm can survive only if it is efficient. Companies all around world, including many large multinationals, have been cutting down the size of their human resources as one of the means of achieving cost efficiency. The problem of over-manning is very severe in the developing countries. Unless these firms get rid of the surplus labour, they can hardly be competitive and successful. That means, the liberalisation can succeed only if the ecol1omy grows
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LESSON 5: GLOBALIZATION, REGIONAL INTEGRATION, PROS AND CONS OF GLOBALIZATION AND HOW TO ENTER FOREIGN MARKETS
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very fast to absorb, the displaced labour and the new addition to the -laoour force. The developing countries, in general, have been disadvantaged by the international trading system. The adverse term of trade led to economic loss for the developing countries, in general. The least developed countries have been the most deprived. It may, however, be noted that one of the reason for the adverse of trade of the developing countries is the demandsupply factor. It is also estimated that the least developed countries stand to lose up to $600 million a year and subSaharan Africa $ 1.2 billion as a result of the Uruguay Round Agreement, while the developed countries are expected to gain very substantially. Multilateral trade liberalisations were mostly in respect of goods traded between industrial economies and those exported from developing to the developed nations did not benefit so much. While developing countries as a group now face tariffs 10 per cent higher than the global average, the least developed countries face tariffs 30 per cent higher, because tariffs remain high on the goods with greatest potential for the poorest countries, such as textiles, leather and agricultural commodities. It should, however, be noted that a number of developing countries have improved their export performance substantially and several of them figure in the list of the top 20 exporters. Despite the different problems and discriminations, there are chances of developing countries benefiting from trade. Basic trade theory argues that poor people gain from trade liberalization. Developing countries have a comparative advantage, in-abundant, low -cost, unskilled labour. If they concentrate on goods whose production is simple and labour intensive, greater integration into global markets should increase their exports and output, raising the demand for unskilled labour and raising the income of the poor relative to those of the non-poor. Moreover, countries move up the trade ladder, exporting more sophisticated products, leaving space on the ladder below for later-industrialising countries. All this helps reduce poverty. The countries on the higher rungs benefit most, but even those on the lower rugs should see poverty fall. And free trade should also help poor consumers-without trade protection, local prices should fall to world prices. There should also be benefits for employment from a liberal financial regime. Removing restrictions on capital flows should attract more FDI, creating more jobs for the poor by integrating them into international systems of production. It is criticized that developed nations receive most of the FDI. A vary small number of the developing countries, which are the relatively developed or large or fast growing in the developing world for the lion’s share of the FDI flows to this category. What the critics do not appreciate is that, as foreign investment flows are based one economic rational, it is unrealistic to export the pattern of flow to be different. Another criticism is that the liberalisation increases the economic inequality. Even in China, the liberalisation has created many island of affluence. If inequality increases because of the worsening of the living conditions of the poor, it certainly is unjustifiable. But, if the increase in inequality is the result of
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improving the economic conditions of a section, while there is no economic deterioration of any section, or because of the disproportionate benefits, the question is whether the economic progress of some sections should be curbed so that there will not be a widening of the inequality. The liberalisation may increase inequality. Further, several sectors and sections may not directly and immediately benefit from mere liberalisation. There may also be shocks and other adverse effects on the weaker sections. It is, therefore, necessary that there should be real socioeconomic reforms rather than mere liberalisation. Targeted poverty eradication programmes and social safety net are very important. The fast growth and overall development resulting from liberalisation could have a major impact on poverty. Naisbitt points out that there were an estimated 200 to 270 million Chinese living in absolute poverty in 1978 (the year in which the liberalisation began) and their number came down to 100 million by 1985. Foreign capital has significantly boosted investment and economic growth in China. China has leaped forward on the export front too. Foreign funded enterprises contribute a substantial chunk of the exports from China. Other countries which, carry out proper reforms in real earnest should also be expected to reap such gains in varying degrees. But, half-hearted and confused measures and implementation problems may create more problems than they solve. Although the MNCs, by the virtue of their size and resources, have certain advantages they may also have limitations or disadvantages in certain spheres or aspects of business. Small and medium firms often have some edge over the very large ones in respects of standardized products or technologies like greater flexibility and adaptability, lower overheads, intimacy with the customers, etc. Low costs is a great advantage which firms from developing countries enjoy. It may be noted that the major component of growth of several India pharmaceutical firms is the foreign market. They are relying mostly on bulk drugs and. generics. What is often ignored while discussing the impact of the product patent is that patented drugs for only about 15 per cent of the India drug market. There are several more products, which would go off patent in the coming years which can also be taken up the India firms. The new patent regime should be expected help the Indian industry by prompting it to give added thrust to R&D and thereby enabling Indian firms also to develop patented products. Positive signs are already there on the horizon. There are also many evidences of the better technology brought in by the MNCs inducing or provoking Indian firms to absorb similar technology leading to their enhanced competitiveness and market expansion. Foreign market entry strategies One of the most important strategic decisions in international business is the mode of entering the foreign market. On the one extreme, a company may do the complete manufacturing of the product domestically and export it to the foreign market. On the other extreme, a company may do, by itself, the complete manufacturing of the product to be marketed in the
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In some cases, the alternatives available may also be limited. For example, the policy of some governments may not be very positive towards foreign investments. Several governments have a definite preference for t venture over complete foreign ownership. In some cases, the government may prefer foreign investment leading to Import Substitution to perpetual Import of a product. Thus, in some cases, government policies may rule out the best alternative if the environment were free. Important foreign market entry strategies are the following.. 1.
Exporting
2.
Licensing I franchising
3. 4.
Contract manufacturing Management contract
5.
Assembly operations
6.
Fully owned manufacturing facilities
7.
t venturing
8.
Countertrade
9.
Mergers and acquisitions
The alternatives to making in foreign countries by the international marketer for marketing the goods in the foreign countries are licensing and contract manufacturing. Although these have certain advantages, there are also certain risks. Hence, if a company does not want to go in for licensing or contract manufacturing, the only avenue open is exporting. Although exporting may turn out to be the best alternative under a given set of conditions or erivironmental factors, then are several sets of conditions which make exporting less attractive than one or more of other alternatives. Policies of some foreign governments discriminate against imports; in some cases import is even banned. It may be noted that hostility against imports have been encouraging substitution of exports by production in the foreign markets. A number of foreign companies have setup production facilities in the European Community to overcome the import barriers. Japanese transplants in North America have also been caused to a considerable extent by the hostility towards imports. Besides, in a number of a cases cost considerations make foreign production or assembly preferable to other entry strategies. Further, exporting marks the first stage in the evolution of international business of many companies. As the international business grows or as the environment changes or to expand the business it may become necessary to change the strategies.
10. Strategic alliance 11. Third country location Exporting Exporting, the most traditional mode of entering the foreign market, is quite a common one even now. International trade has been growing much faster than the world output resulting in greater world economic integration. Exporting is the appropriate strategy when one of more of the following conditions prevail. 1. The volume of foreign business is not large enough to justify production in the foreign market. 2. Cost of production in the foreign market is high. 3. The foreign market is characterised by production bottlenecks like infrastructural problems, problems with materials supplies etc. 4. There are political or other risks of investment in the foreign country. 5. The company has no permanent interest in the foreign market concerned or that there is no guarantee of the market available for a long period. 6. Foreign investment is not favoured by the foreign country concerned. 7. Licensing or contract manufacturing is not a better alternative. . Exporting is more attractive than other modes particularly when underutilised capacity exists. Even when there is no excess capacity, expansion of the existing facility may sometimes be easier and less costly than setting up production facilities
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abroad. Further, many governments, as in India, provide incentives for establishing facilities for export production.
Licensing And Franchising Licensing and Franchising, which involve minimal commitment of resources and effort on the part of the International marketer, are easy ways of entering the foreign markets. Under International licensing, a firm in one country (the licensor) permits a firm in another country (the licensee) to use its intellectual property (such as patents, trade marks, copyrights, technology, technical know-how, marketing skill or some other specific skill). The monetary benefit to the licensor is the royalty or fees which licensee pays. In many countries, such fees or royalties are regulated by the government; it does not exceed five per cent of the sales in many developing countries. A licensing agreement may also be one of cross licensing, wherein there is a mutual exchange of knowledge and/or patents. In cross licensing, a cash payment mayor may not be involved. Franchising is “a form of licensing in which a parent company (the franchiser) grants another independent entity (the franchisee) the right to do business in a prescribed manner. This right can take the form of selling the Franchiser’s products, ‘using its name, production and marketing techniques, or general business approach.” One of the common forms of franchising involves the franchisor supplying an important ingredient (part, material etc.,) for the finished product, like the Coca-Cola supplying the syrup to the bottlers. Usually franchising involves a combination of many of the elements mentioned above. The major forms of franchising are manufacturer - retailer systems (such as automobile dealership), manufacturer-wholesaler systems (such as soft drink compa-
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foreign market there itself. There are several alternatives in between these two extremes. The choice of the most suitable alternative is based on the relevant factors related to the company and the foreign market.
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nies), and service firm - retailer systems (such as lodging services and fast food outlets).
2. It frees the company from the risks of investing in foreign countries.
International licensing/franchising have grown very substantially. Czinkota and Ronkainen succinctly describe their attractiveness or reasons for popularity:
3. If idle production capacity is readily available in the foreign country, it enables the marketer to get started immediately.
“As an entry strategy, it requires neither capital investment nor knowledge and marketing strength in foreign markets. By earning royalty income, it provides an opportunity to exploit research and development already committed to Licensing reduces risk of exposure to government intervention in that the licensee is typically a local company that can provide leverage against government action. Licensing will help to avoid host country regulations that are more prevalent in equity ventures. Licensing may also serve as a stage in the internationalisation of the firm by providing a means by which foreign markets can be tested without major involvement or capital or management time. Another advantage of licensing is that it may be employed as a pre-emptive strategy against competitors by combing the foreign markets before the competitors could enter. Thus, the General Electric of U.S.A by licensing its advanced gas turbine technology to foreign producers who were potential competitors could eliminate possible competition from them. Licensing has been used by many companies also to harvest their obsolete products. This strategy has been employed, in particular, in developing countries. When the market is closed by the host country regulations either to imports or to foreign investment, licensing may provide a viable opportunity to enter such a market. From the point of view of the licensee, licensing provides the great advantage of entering the market with a proven product/ technology or marketing intangible without having to run the risk of R & D failures. It also reduces the investment requirements. One of the important risks of licensing is that the licensor would be developing a potential competitor; the licensee would become a competitor after the expiry of the licensing agreement. The licensee may even develop capabilities to introduce better products. The skill of the Japanese in product improvement is well known. Licensees in the developing countries might gain an edge over the licensor, after the term of the’ license, because of their low cost of labour which would enable them to compete with the erstwhile licensor in his own home market as well as in the foreign markets. Some companies are, therefore, hesitant to enter into licensing agreements. Contract Manufacturing Under contract manufacturing, a company doing international marketing contracts with firms in foreign countries to manufacture or assemble the products while retaining the responsibility of marketing the product. This is a common practice in international, business. Contract manufacturing has the following advantages. 1. The company does not have to commit resource for setting up production facilities.
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4. In many cases, the cost of the product obtained by contract manufacturing is lower than if it were manufactured by the international firm. For example, the product cost in the small scale sector is much lower than in the large scale sector for many products because of the lower wages, lower overheads, and tax concessions. More over, if excess capacities are available with existing units, it may even be possible to get the product supplied on the marginal cost basis. 5. Contract manufacturing also has the advantage that it is a less risky way to start with. If the business does not pick up sufficiently, dropping it is easy; but if the company had established its own production facilities, the exit would be difficult. Moreover, contract manufacturing may enable the international firm to enlist national . Contract manufacturing, however, has the following disadvantages. 1. In some cases, there will be the loss of potential profits from manufacturing. 2. Less control over the manufacturing process. 3. Contract manufacturing also has the risk of developing potential competitors.. 4. It would not be suitable in cases of high-tech products and cases which involve technical secrets etc. Management Contracting Under the management contract, the firm providing the management know-how may not have any equity stake in the enterprise being managed. In short, in a management contract the supplier brings together a package of skills that will provide an integrated service to the client without incurring the risk and benefit of ownership Thus, as Kotler observes, management contracting is a low-risk method of getting into a foreign market and it starts yielding income right from the beginning. The arrangement is especially attractive if the contracting firm is given an option to purchase, some shares in the managed company within a stated period. Management contract could, sometimes, bring in additional benefits for the managing company. It may obtain the business of exporting or selling otherwise of the products of the managed company or supplying the inputs required by the managed company. Management contract enables a firm to commercialise existing know-how that has been built up with significant investments and frequently the impact of fluctuations in business volumes can be reduced by making use of experienced personnel who otherwise would have to be laid off. Management contracts, obviously, have clear benefits for the clients. “They can provide organisational skills not available locally, expertise that is immediately available rather than built up, and management assistance in the form of services that would be difficult and costly to replicate locally.”
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One possible risk from the point of view of the client is overdependence and loss of control. The client should enable itself to steadily develop its own capabilities. Some Indian companies - Tata Tea, Harrisons Malayalam and AVT - have contracts to manage a number of plantations in Sri Lanka. Tata Tea also has a t venture in Sri Lanka namely Estate Management Services Pvt. Ltd. Turnkey Contracts Turnkey contracts are common in international business in the supply, erection and commissioning of plants, as in the case of oil refineries, steel mills, cement and fertilizer plants etc; construction projects and franchising agreements. “A turnkey operation is an agreement by the seller to supply a buyer with a facility fully equipped and ready to be operated by the buyer’s personnel, who will be trained by the seller. The term is sometimes used in fast - food franchising when a franchiser agrees to select a store site, build the store, equip it, train the franchisee and- employees and sometimes arrange for the financing”. Many turnkey contracts involve government/public sector as buyer (or seller in some cases) A turnkey contractor may subcontract different phases/parts of the project. Wholly Owned Manufacturing Facilities Companies with long term and substantial interest in the foreign market normally establish fully owned manufacturing facilities there. As Drucker points out, “it is simply not possible to maintain substantial market standing in an important area unless one has a physical presence as a producer.” A number of factors like trade barriers, differences in the production and other costs, government policies etc., encourage the establishment of production facilities in the foreign markets Establishment of manufacturing facilities abroad has several advantages. It provides the firm with complete control over production and quality. It does not have the risk of developing potential competitors as in the case of licensing and contract manufacturing. Wholly owned manufacturing facility has several disadvantages too. In some cases, the cost of production is high in the foreign market. There may also be problems such as restrictions regarding the types of technology, non-availability of skilled labour, production bottlenecks due to infrastructural problems etc. If the market size is small, a separate production unit for the market may be uneconomical. Foreign investment also entails political risks. Fully owned enterprises may not be allowed or favoured in some countries, particularly in low priority areas.
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Moreover, this method demands sufficient financial and. managerial resources on the part of the company. Assembly Operations As Miracle and Albaum point out, a manufacturer who wants many of the advantages that are associated with overseas manufacturing facilities and yet does not want to go that fat may find it desirable to establish overseas assembly facilities in selected markets. In a sense, the establishment. of an assembly operation represents a cross between exporting and overseas manufacturing. Having assembly facilities in foreign markets is very ideal when there are economies of scale in he manufacture of parts and components and when assembly operations are labour intensive, and labour is cheap in the foreign country. It may be noted that a number of U.S. manufacturers ship the parts and components to the developing countries, get the product assembled there and bring it back home. The U.S. tariff law also encourages this. Thus, even products meant to be marketed domestically are assembled abroad. Assembling the product meant for the foreign market in the foreign market itself has certain other advantages, besides the cost advantage. The import duty is normally low on parts and components than on the finished product. Assembly operations would satisfy the ‘local content’ demand, at least to some extent. Because of the employment generation, the foreign government’s attitude will be more favourable than towards the import of the finished product. Another advantage is that the investment to be made in the foreign country is very small in comparison with that required for establishing complete manufacturing facilities. The political risks of foreign investment is, thus, not much. t Ventures t venture is a very common strategy of entering the foreign market. In the widest sense, any form of association which implies collaboration for more than a transitory period is a t venture (pure trading operations are not included in this concept). Such a broad definition encomes many diverse types of t overseas operations, viz, 1. Sharing of ownership and management in an enterprise. 2. Licensing/franchising agreements. 3. Contract manufacturing. 4. Management contracts. Three of the above have already been discussed in the preceding sections. The following paragraphs are confined to the first category referred to above, i.e. t ownership ventures. What is often meant by the term t venture is t ownership venture. The essential feature of a t ownership venture is that the ownership and management are shared between a foreign firm and a local firm. In some cases there are more than two parties involved. A t ownership venture may be brought about by a foreign investor buying an interest in a local company, a local firm
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Management contracts have disadvantages under certain conditions. As Kotler observes, the arrangement is not sensible if the company can put its scarce management talent to better use, or if there are greater profits to be made by undertaking the whole venture. Management contract may prevent a company from setting up its own operations for a particular period.
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acquiring an interest in an existing foreign firm or by both the foreign and local entrepreneurs tly forming a new enterprise.
Countries. In the past, government of India did not permit trade with South Africa and Mauritius.
It is also common practice to split the local interest between a partner and various public participation (including public sector firms or industrial development organisations). Such a strategy may enable the international firm to retain much control despite a minority holding as the power of the remaining shares is spread out. Further, equity holding by the public would help the enterprise get some public . Partnership with government organisation may help to obtain favourable treatment from the government.
Sometimes commercial reasons encourage third country location. For example, several Japanese companies established production facilities in developing countries to circumvent the non-tariff barriers (like quotas, voluntary export restraints and orderly marketing arrangement) to imports to countries like the United States and also to avail of the preferential treatment accorded by the developed countries to the imports from the developing countries.
In countries where fully foreign owned firms are not allowed or favoured, t venture is the alternative if the international marketer is interested in establishing an enterprise in the foreign market. Many foreign companies entered the communist, socialist and other developing countries by t venturing. One important advantage of t venturing is that it permits a firm with limited resources to enter more foreign markets than might be possible under a policy of forming wholly owned subsidiaries. In some cases, it is also possible to swap know-how (such as patent rights for equity) in forming t venture as a means of securing ownership in foreign operations. Partnership with local firms has certain specific advantages. The local partner would be in a better position to deal with the government and the publics. Further, there would not be much public hostility when there is a local partner; it would be much less when there is equity holding by the government sector and the public. A right local partner for a t venture can have a major impact on a firm’s competitiveness because such a partner can serve as a cultural bridge between the manufacturer and the market. For example, several successful foreign d companies have demonstrated how the right partnership can strongly enhance a firm’s competitive edge and. its ability to adapt to and cope with the idiosyncrasies of the Japanese market. A t venture can succeed only if both the partners have something definite to offer to the advantage of the other, and reap definite advantages, and have mutual trust and respect. Third Country Location Third country location is sometimes used as an entry strategy. When there are no commercial transactions between two nations because of political reasons or when direct transactions between two nations are difficult due to political reasons or the like, a firm in one of these nations which wants to enter the other market will have to operate from a third country base. For example, Taiwanese entrepreneurs found it easy to enter People’s Republic of China through bases in Hong Kong.
Further, third country location may be resorted to reduce cost of production and thereby to increase price competitiveness to facilitate market entry or for improving/maintaining the market position. The incentives offered by governments, particularly of the developing countries, for investment and exports encourage such third country location. The export processing zones are particularly attractive in this respect. Mergers and Acquisitions Mergers and acquisitions (M & A) have been a very important market entry strategy as well as expansion strategy. A number of Indian companies have also used this entry strategy. Mergers and acquisitions have certain specific advantages: It provides instant access to markets and distribution network. As one of the most difficult areas in international marketing is the distribution, this is often a very important consideration for M & A. Another important objective of M and A is to obtain access to new technology or a patent right. M and A also has the advantage of reducing the competition. Mergers and acquisitions may also give rise to some problems which arise mostly because of the deficiencies of the evaluation of the case for acquisition. Sometimes the cost of acquisition may be unrealistically high. Further, when a enterprise is taken over, air its problems are also acquired with it. The success of the enterprise will naturally depend on the success in solving the problems. See the section Cross-border M&As in the Chapter on International Investments for mote information. Strategic Alliance Strategic alliance has been becoming more and more popular in international business. Also known by such names as entente and coalition, this strategy seeks to enhance the long term competitive advantage of the firm by forming alliance with its competitors, existing or potential in critical areas, ‘instead of competing with each other. “The goals are to leverage critical capabilities, increase the flow of innovation and increase flexibility in responding to market and technological changes.”
Third country location may also be helpful to take advantage of toe friendly trade relations between the third country and the foreign market concerned. Thus, for example, Rank Xerox found it convenient to enter the erstwhile USSR through its Indian t venture Modi Xerox.
Strategic alliance is also sometimes used as a market entry strategy. For example, a firm may enter a foreign market by forming an alliance with a firm in the foreign market for marketing or distributing the former’s products. A U.S. pharmaceutical firm may use the sales promotion and distribution infrastructure of a Japanese pharmaceutical firm to sell its products in Japan. In return, the Japanese firm can use the same strategy for the sale of its products in the U.S. market.
There are several cases of countries not having direct commercial transactions. For example, it was true of Israel and Arab
Strategic alliance, more than an entry strategy, is a competitive strategy. -
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1. Technology development alliances like research consortia, simultaneous engineering agreements, licensing or t development agreements. 2. Marketing, sales and service alliances in which a company makes use of the marketing infrastructure etc., of another company, in the foreign market, for its products. This may help easy penetration of the foreign market and preemption of potential competitors. 3. Multiple activity alliance which involves the combining of two or more types of alliances. While marketing alliances are often single country alliances, as international firms take on different allies in each country, technology development and operations alliances are usually multi-country since these kinds of activities can be employed over several countries. 4. Multiple activity alliance involves the combining of two or more types of alliances. While marketing alliances are often single country alliances, as international firms take on different allies in each country, technology development and operations alliances are usually multi-country since these kinds of activities can be employed over several countries. Strategic alliances also differ according to how they are structured. They can be equity based (t ventures) or non-equity based. Non-equity based alliances such as technology transfer agreements, licensing agreements, marketing agreements etc., are proving to be more dynamic, more constructive and more strategic, according to Magsaysay. As indicated above, several areas of business - from Rand D to distribution - provide scope for alliance. Whether it is in R and D, manufacturing or marketing, an important objective of the collaboration is to maximise marginal contribution to fixed cost. Countertrade Although the major reason for the substantial growth of counter trade is its use as a strategy to increase exports, particularly by the developing countries, countertrade has been successfully used by a number of companies as an entry strategy. For example, Pepsi Co, gained entry to the USSR by employing this strategy. Countertrade is a form of international trade in which certain export and import transactions are directly linked with each other and in which import of goods are paid for by export of goods, instead of money payments. In the modern economies, most transactions involve monetary payments and receipts, either immediate or deferred. As against this, “countertrade refers to a variety of unconventional international trade practices which link exchange of goods directly or indirectly - in an attempt to dispense with currency transactions.” Forms of Countertrade: Countertrade takes several forms. The following are the most common among them.
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Barter: Barter refers to direct exchange of goods of equal value, with no money and no third arty involved in it. For example, a countertrade deal between the Minerals and Metals Trading corporation of India (MMTC) and a Yugoslavian company involved import of 50, 000 tonnes of rails of the value of about $ 38 million by the MMTC and the purchase by the Yugoslavian company of iron ore concentrates and pellets of the same value. Buy Back: Under the buy back agreement, the supplier of plant, equipment or technology agrees to purchase goods manufactured with that equipment, or technology. Under the buy back scheme, the full payment may be made in kind or a part may be made in kind and the balance in cash. Thus, a Rs. 20 corer buy back agreement with the Soviet Union provided for the import of 200 sophisticated looms by the National Textiles Corporation. The buy back ratio was 75 per cent. Compensation Deal: Under this arrangement, the seller receives a part of the payment in cash and the rest in products. Counterpurchase: Under the counterpurchase agreement the seller receives the full payment in cash but agrees to spend an equivalent am punt of money in that country within a specified period. A classic example of this kind of an agreement was Pepsi Cola’s trade with the USSR. Pepsi Cola at paid in Rubles for the sale of its concentrates in the USSR but spent this amount for purchase of Russian products like Vodka and wine. Countertrade has been growing with government patronage It may be noted that the South commission has advocated countertrade as a useful mechanism for overcoming, difficulties of payments, export credit, and foreign exchange which might otherwise be serious obstacles to the expansion of trade between developing countries. As the Commission points out, so far the bulk of countertrade between developing countries has been conducted mostly through intermediaries in the industrial countries. It is the developed countries who have benefited most form this type of trade de, and they obviously have no interest in helping the indirect trailing partners in the LCDs to establish direct s and develop durable trading relationships. Therefore, the developing countries need to organize themselves of countertrade as this can also pave the way for the growth of more conventional trading relations. Reasons for the Growth of Countertrade: There have been several reasons for the countertrade to become popular. Obviously, the countries or companies concerned have encouraged or involved in countertrade due to certain specific advantages, although some of the benefits may be purely temporary. 1. Countertrade was very common between the communist countries. It also became popular in respect of trade between the Communist Block and many developing countries because many developing countries were eagerly looking towards this block for increasing their exports, among other things, and this naturally led to the acceptance of the trade practice preferred by these centrally planned economies. 2. Countertrade became popular in the East-West trade mainly due to the foreign exchange problems faced by the East Block. Pepsi Cola is just one example of a multinational
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There are different types of alliances according to purpose or structure. Based on the description of the generic forms of coalitions by Michael Porter ‘and Mark Fuller, Magsaysay classifies alliances according to purpose as follows.
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corporation which made considerable international business with the USSR by countertrade. 3. When the foreign exchange problem became more severe for the developing countries following the oil price hikes, they began to actively pursue countertrade in a frantic bid to increase their exports by all means. 4. Many companies in the advanced countries have resorted to countertrade for various reasons like selling obsolete products, increasing the sale of capital goods, increasing the aggregate business etc. Countertrade has also been resorted to by several companies to mitigate the effects of recession. Such recessionary situations in the capital goods industries in the advanced countries gave the developing countries an opportunity to push their exports by tying the imports of capital goods with exports by countertrade. 5. The results of the above survey also suggest that countertrade enables firms to penetrate difficult markets, to increase sales volume and to achieve fuller capacity utilisation. It has also been revealed that countertrade enables firms to dispose of declining products, which is particularly important given the very rapid pace of technological advance. 6. Some countries have also made the countertrade a means to increase sales through disguised undercutting of the cartel prices (for example, the oil price fixed by the OPEC). 7. Having realised the potential of increasing the business by engaging in countertrade, many international trading corporations became active in the countertrade. Their trading with many countries enabled them even to take up such complex transactions as the case of Daimler Benz cited earlier. Drawbacks Although counter trade has several justifications, particularly in the short run, it suffers from a number of disadvantages and problems, particularly in the long run. Firstly, countertrade encourages bilateralism at the expense of multilateralism. Secondly, it adversely affects export market development. Thirdly, although several developing countries regard countertrade as an easy route to export, they often stand to lose in of price. For instance, Poland bought Libyan oil at a discount and sold it at a higher price on the Rotterdam spot market. Fourthly, it very adversely affects competition. Activity: - (Questions)
Q1) Explain in detail the pros and cons of globalization? Q2) What are the different strategies businesses follow to enter foreign markets?
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• To know how to enter the foreign markets. Introduction to the lecture: Before studying this chapter please go through the first chapter of introduction of international business which also talks about the meaning of globalization at length and how it effects the economy and working of business in a particular country and the world as a whole. This chapter is just an extension of that chapter. Pros and cons of globalisation While globalisation has several benefits, it has a number of problems. While developing countries which, in the past, where against globalisation, have wide opened their doors for globalisation, many people in developed like USA are angry against globalisation. American jobs and wage levels are severely affected by the influx of cheap imports and shifting of production to low cost overseas locations. According to a business week/ Harries poll in early 2000, more than two-thirds of American believe that globalisation drags down U S wages. A strong majority of the American feels that trade policies have not adequately addressed the concerns of American workers, international labour standards, or the environment. The important pros and cons of globalisation according to the above survey ate the following. Productivity grows more quickly when countries produce goods and services in which they have comparative advantage. Living standards can go up faster. Global competition and imports keep a lid in prices, so inflation is less likely to derail economic growth. An open economy spurs innovation with fresh ideas from abroad. Export jobs often pay more than other jobs. Unfettered capital flows give the US access to foreign investment and jeep interest rated low. The adverse effects of globalisation according to the survey are: Millions of America have lost jobs due to imports or production shifts abroad. Most find new jobs that pay less. Millions of others fear losing their jobs, especially at those companies operating under competitive pressure. Workers face pay cut demands from employers, which often threaten to export jobs. Service and white collar jobs are increasingly vulnerable to operations moving offshore. U S employees can lose their comparative advantage when companies build advanced factories in low-wage countries, making them as productive as those at home. 11.154
True, globalisation can benefit the developing countries in several ways. It is, however, apprehended that unregulated globalisation will cause serious problems for developing countries. The almost universal acceptance of the market economy and the globalisation driven by private enterprise tend to aggravate most of the harmful effects traditionally attributed to neocolonialism. The global dominance of industries by MNCs is on the increase. Many countries are indiscriminate in liberalizing foreign investment. Pepsi, Coke and “junk foods” are allowed even in countries like China. A number of countries allow high foreign stake even in industries where that is not really required. This could affect domestic enterprise of developing countries. There have been a large number of cases of takeover of national firms by foreign firms. In some of these cases, the domestic firms are driven to a situation of a situation of having to hand over the majority or complete equity to the foreign partners of t ventures because or the inability of the Indian partners to bring in additional capital or some other incapability. Replacement of traditional and indigenous products by modern product, resulting in the ruin of traditional crafts and industries and the livelihood of people in these sectors have also been happening in several countries. One common criticism has been that the technology that the MNCs bring in may not be the one suited to the liberalized environment of today, another problem, viz., the dumping of outmoded technology to the developing world is not as valid today as in the past and in future it is likely to be even less valid. In the past, because of the entry restrictions and resultant absence or lack of competition, developing countries could be used as a dumping ground for obsolete products, including technology. The business environment today, however, is vastly different. Because of the competition between MNCs (and national firms) made possible by the dismantling of entry barriers (and freeing of technology imports by national firms and added thrust on R&D by them) technological edge is an important determinant of success. The evolution of the motorcar market in India, for example, gives come indication of this. In a competitive environment, a firm can survive only if it is efficient. Companies all around world, including many large multinationals, have been cutting down the size of their human resources as one of the means of achieving cost efficiency. The problem of over-manning is very severe in the developing countries. Unless these firms get rid of the surplus labour, they can hardly be competitive and successful. That means, the liberalisation can succeed only if the ecol1omy grows
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LESSON 5: GLOBALIZATION, REGIONAL INTEGRATION, PROS AND CONS OF GLOBALIZATION AND HOW TO ENTER FOREIGN MARKETS
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very fast to absorb, the displaced labour and the new addition to the -laoour force. The developing countries, in general, have been disadvantaged by the international trading system. The adverse term of trade led to economic loss for the developing countries, in general. The least developed countries have been the most deprived. It may, however, be noted that one of the reason for the adverse of trade of the developing countries is the demandsupply factor. It is also estimated that the least developed countries stand to lose up to $600 million a year and subSaharan Africa $ 1.2 billion as a result of the Uruguay Round Agreement, while the developed countries are expected to gain very substantially. Multilateral trade liberalisations were mostly in respect of goods traded between industrial economies and those exported from developing to the developed nations did not benefit so much. While developing countries as a group now face tariffs 10 per cent higher than the global average, the least developed countries face tariffs 30 per cent higher, because tariffs remain high on the goods with greatest potential for the poorest countries, such as textiles, leather and agricultural commodities. It should, however, be noted that a number of developing countries have improved their export performance substantially and several of them figure in the list of the top 20 exporters. Despite the different problems and discriminations, there are chances of developing countries benefiting from trade. Basic trade theory argues that poor people gain from trade liberalization. Developing countries have a comparative advantage, in-abundant, low -cost, unskilled labour. If they concentrate on goods whose production is simple and labour intensive, greater integration into global markets should increase their exports and output, raising the demand for unskilled labour and raising the income of the poor relative to those of the non-poor. Moreover, countries move up the trade ladder, exporting more sophisticated products, leaving space on the ladder below for later-industrialising countries. All this helps reduce poverty. The countries on the higher rungs benefit most, but even those on the lower rugs should see poverty fall. And free trade should also help poor consumers-without trade protection, local prices should fall to world prices. There should also be benefits for employment from a liberal financial regime. Removing restrictions on capital flows should attract more FDI, creating more jobs for the poor by integrating them into international systems of production. It is criticized that developed nations receive most of the FDI. A vary small number of the developing countries, which are the relatively developed or large or fast growing in the developing world for the lion’s share of the FDI flows to this category. What the critics do not appreciate is that, as foreign investment flows are based one economic rational, it is unrealistic to export the pattern of flow to be different. Another criticism is that the liberalisation increases the economic inequality. Even in China, the liberalisation has created many island of affluence. If inequality increases because of the worsening of the living conditions of the poor, it certainly is unjustifiable. But, if the increase in inequality is the result of
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improving the economic conditions of a section, while there is no economic deterioration of any section, or because of the disproportionate benefits, the question is whether the economic progress of some sections should be curbed so that there will not be a widening of the inequality. The liberalisation may increase inequality. Further, several sectors and sections may not directly and immediately benefit from mere liberalisation. There may also be shocks and other adverse effects on the weaker sections. It is, therefore, necessary that there should be real socioeconomic reforms rather than mere liberalisation. Targeted poverty eradication programmes and social safety net are very important. The fast growth and overall development resulting from liberalisation could have a major impact on poverty. Naisbitt points out that there were an estimated 200 to 270 million Chinese living in absolute poverty in 1978 (the year in which the liberalisation began) and their number came down to 100 million by 1985. Foreign capital has significantly boosted investment and economic growth in China. China has leaped forward on the export front too. Foreign funded enterprises contribute a substantial chunk of the exports from China. Other countries which, carry out proper reforms in real earnest should also be expected to reap such gains in varying degrees. But, half-hearted and confused measures and implementation problems may create more problems than they solve. Although the MNCs, by the virtue of their size and resources, have certain advantages they may also have limitations or disadvantages in certain spheres or aspects of business. Small and medium firms often have some edge over the very large ones in respects of standardized products or technologies like greater flexibility and adaptability, lower overheads, intimacy with the customers, etc. Low costs is a great advantage which firms from developing countries enjoy. It may be noted that the major component of growth of several India pharmaceutical firms is the foreign market. They are relying mostly on bulk drugs and. generics. What is often ignored while discussing the impact of the product patent is that patented drugs for only about 15 per cent of the India drug market. There are several more products, which would go off patent in the coming years which can also be taken up the India firms. The new patent regime should be expected help the Indian industry by prompting it to give added thrust to R&D and thereby enabling Indian firms also to develop patented products. Positive signs are already there on the horizon. There are also many evidences of the better technology brought in by the MNCs inducing or provoking Indian firms to absorb similar technology leading to their enhanced competitiveness and market expansion. Foreign market entry strategies One of the most important strategic decisions in international business is the mode of entering the foreign market. On the one extreme, a company may do the complete manufacturing of the product domestically and export it to the foreign market. On the other extreme, a company may do, by itself, the complete manufacturing of the product to be marketed in the
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In some cases, the alternatives available may also be limited. For example, the policy of some governments may not be very positive towards foreign investments. Several governments have a definite preference for t venture over complete foreign ownership. In some cases, the government may prefer foreign investment leading to Import Substitution to perpetual Import of a product. Thus, in some cases, government policies may rule out the best alternative if the environment were free. Important foreign market entry strategies are the following.. 1.
Exporting
2.
Licensing I franchising
3. 4.
Contract manufacturing Management contract
5.
Assembly operations
6.
Fully owned manufacturing facilities
7.
t venturing
8.
Countertrade
9.
Mergers and acquisitions
The alternatives to making in foreign countries by the international marketer for marketing the goods in the foreign countries are licensing and contract manufacturing. Although these have certain advantages, there are also certain risks. Hence, if a company does not want to go in for licensing or contract manufacturing, the only avenue open is exporting. Although exporting may turn out to be the best alternative under a given set of conditions or erivironmental factors, then are several sets of conditions which make exporting less attractive than one or more of other alternatives. Policies of some foreign governments discriminate against imports; in some cases import is even banned. It may be noted that hostility against imports have been encouraging substitution of exports by production in the foreign markets. A number of foreign companies have setup production facilities in the European Community to overcome the import barriers. Japanese transplants in North America have also been caused to a considerable extent by the hostility towards imports. Besides, in a number of a cases cost considerations make foreign production or assembly preferable to other entry strategies. Further, exporting marks the first stage in the evolution of international business of many companies. As the international business grows or as the environment changes or to expand the business it may become necessary to change the strategies.
10. Strategic alliance 11. Third country location Exporting Exporting, the most traditional mode of entering the foreign market, is quite a common one even now. International trade has been growing much faster than the world output resulting in greater world economic integration. Exporting is the appropriate strategy when one of more of the following conditions prevail. 1. The volume of foreign business is not large enough to justify production in the foreign market. 2. Cost of production in the foreign market is high. 3. The foreign market is characterised by production bottlenecks like infrastructural problems, problems with materials supplies etc. 4. There are political or other risks of investment in the foreign country. 5. The company has no permanent interest in the foreign market concerned or that there is no guarantee of the market available for a long period. 6. Foreign investment is not favoured by the foreign country concerned. 7. Licensing or contract manufacturing is not a better alternative. . Exporting is more attractive than other modes particularly when underutilised capacity exists. Even when there is no excess capacity, expansion of the existing facility may sometimes be easier and less costly than setting up production facilities
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abroad. Further, many governments, as in India, provide incentives for establishing facilities for export production.
Licensing And Franchising Licensing and Franchising, which involve minimal commitment of resources and effort on the part of the International marketer, are easy ways of entering the foreign markets. Under International licensing, a firm in one country (the licensor) permits a firm in another country (the licensee) to use its intellectual property (such as patents, trade marks, copyrights, technology, technical know-how, marketing skill or some other specific skill). The monetary benefit to the licensor is the royalty or fees which licensee pays. In many countries, such fees or royalties are regulated by the government; it does not exceed five per cent of the sales in many developing countries. A licensing agreement may also be one of cross licensing, wherein there is a mutual exchange of knowledge and/or patents. In cross licensing, a cash payment mayor may not be involved. Franchising is “a form of licensing in which a parent company (the franchiser) grants another independent entity (the franchisee) the right to do business in a prescribed manner. This right can take the form of selling the Franchiser’s products, ‘using its name, production and marketing techniques, or general business approach.” One of the common forms of franchising involves the franchisor supplying an important ingredient (part, material etc.,) for the finished product, like the Coca-Cola supplying the syrup to the bottlers. Usually franchising involves a combination of many of the elements mentioned above. The major forms of franchising are manufacturer - retailer systems (such as automobile dealership), manufacturer-wholesaler systems (such as soft drink compa-
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foreign market there itself. There are several alternatives in between these two extremes. The choice of the most suitable alternative is based on the relevant factors related to the company and the foreign market.
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nies), and service firm - retailer systems (such as lodging services and fast food outlets).
2. It frees the company from the risks of investing in foreign countries.
International licensing/franchising have grown very substantially. Czinkota and Ronkainen succinctly describe their attractiveness or reasons for popularity:
3. If idle production capacity is readily available in the foreign country, it enables the marketer to get started immediately.
“As an entry strategy, it requires neither capital investment nor knowledge and marketing strength in foreign markets. By earning royalty income, it provides an opportunity to exploit research and development already committed to Licensing reduces risk of exposure to government intervention in that the licensee is typically a local company that can provide leverage against government action. Licensing will help to avoid host country regulations that are more prevalent in equity ventures. Licensing may also serve as a stage in the internationalisation of the firm by providing a means by which foreign markets can be tested without major involvement or capital or management time. Another advantage of licensing is that it may be employed as a pre-emptive strategy against competitors by combing the foreign markets before the competitors could enter. Thus, the General Electric of U.S.A by licensing its advanced gas turbine technology to foreign producers who were potential competitors could eliminate possible competition from them. Licensing has been used by many companies also to harvest their obsolete products. This strategy has been employed, in particular, in developing countries. When the market is closed by the host country regulations either to imports or to foreign investment, licensing may provide a viable opportunity to enter such a market. From the point of view of the licensee, licensing provides the great advantage of entering the market with a proven product/ technology or marketing intangible without having to run the risk of R & D failures. It also reduces the investment requirements. One of the important risks of licensing is that the licensor would be developing a potential competitor; the licensee would become a competitor after the expiry of the licensing agreement. The licensee may even develop capabilities to introduce better products. The skill of the Japanese in product improvement is well known. Licensees in the developing countries might gain an edge over the licensor, after the term of the’ license, because of their low cost of labour which would enable them to compete with the erstwhile licensor in his own home market as well as in the foreign markets. Some companies are, therefore, hesitant to enter into licensing agreements. Contract Manufacturing Under contract manufacturing, a company doing international marketing contracts with firms in foreign countries to manufacture or assemble the products while retaining the responsibility of marketing the product. This is a common practice in international, business. Contract manufacturing has the following advantages. 1. The company does not have to commit resource for setting up production facilities.
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4. In many cases, the cost of the product obtained by contract manufacturing is lower than if it were manufactured by the international firm. For example, the product cost in the small scale sector is much lower than in the large scale sector for many products because of the lower wages, lower overheads, and tax concessions. More over, if excess capacities are available with existing units, it may even be possible to get the product supplied on the marginal cost basis. 5. Contract manufacturing also has the advantage that it is a less risky way to start with. If the business does not pick up sufficiently, dropping it is easy; but if the company had established its own production facilities, the exit would be difficult. Moreover, contract manufacturing may enable the international firm to enlist national . Contract manufacturing, however, has the following disadvantages. 1. In some cases, there will be the loss of potential profits from manufacturing. 2. Less control over the manufacturing process. 3. Contract manufacturing also has the risk of developing potential competitors.. 4. It would not be suitable in cases of high-tech products and cases which involve technical secrets etc. Management Contracting Under the management contract, the firm providing the management know-how may not have any equity stake in the enterprise being managed. In short, in a management contract the supplier brings together a package of skills that will provide an integrated service to the client without incurring the risk and benefit of ownership Thus, as Kotler observes, management contracting is a low-risk method of getting into a foreign market and it starts yielding income right from the beginning. The arrangement is especially attractive if the contracting firm is given an option to purchase, some shares in the managed company within a stated period. Management contract could, sometimes, bring in additional benefits for the managing company. It may obtain the business of exporting or selling otherwise of the products of the managed company or supplying the inputs required by the managed company. Management contract enables a firm to commercialise existing know-how that has been built up with significant investments and frequently the impact of fluctuations in business volumes can be reduced by making use of experienced personnel who otherwise would have to be laid off. Management contracts, obviously, have clear benefits for the clients. “They can provide organisational skills not available locally, expertise that is immediately available rather than built up, and management assistance in the form of services that would be difficult and costly to replicate locally.”
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One possible risk from the point of view of the client is overdependence and loss of control. The client should enable itself to steadily develop its own capabilities. Some Indian companies - Tata Tea, Harrisons Malayalam and AVT - have contracts to manage a number of plantations in Sri Lanka. Tata Tea also has a t venture in Sri Lanka namely Estate Management Services Pvt. Ltd. Turnkey Contracts Turnkey contracts are common in international business in the supply, erection and commissioning of plants, as in the case of oil refineries, steel mills, cement and fertilizer plants etc; construction projects and franchising agreements. “A turnkey operation is an agreement by the seller to supply a buyer with a facility fully equipped and ready to be operated by the buyer’s personnel, who will be trained by the seller. The term is sometimes used in fast - food franchising when a franchiser agrees to select a store site, build the store, equip it, train the franchisee and- employees and sometimes arrange for the financing”. Many turnkey contracts involve government/public sector as buyer (or seller in some cases) A turnkey contractor may subcontract different phases/parts of the project. Wholly Owned Manufacturing Facilities Companies with long term and substantial interest in the foreign market normally establish fully owned manufacturing facilities there. As Drucker points out, “it is simply not possible to maintain substantial market standing in an important area unless one has a physical presence as a producer.” A number of factors like trade barriers, differences in the production and other costs, government policies etc., encourage the establishment of production facilities in the foreign markets Establishment of manufacturing facilities abroad has several advantages. It provides the firm with complete control over production and quality. It does not have the risk of developing potential competitors as in the case of licensing and contract manufacturing. Wholly owned manufacturing facility has several disadvantages too. In some cases, the cost of production is high in the foreign market. There may also be problems such as restrictions regarding the types of technology, non-availability of skilled labour, production bottlenecks due to infrastructural problems etc. If the market size is small, a separate production unit for the market may be uneconomical. Foreign investment also entails political risks. Fully owned enterprises may not be allowed or favoured in some countries, particularly in low priority areas.
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Moreover, this method demands sufficient financial and. managerial resources on the part of the company. Assembly Operations As Miracle and Albaum point out, a manufacturer who wants many of the advantages that are associated with overseas manufacturing facilities and yet does not want to go that fat may find it desirable to establish overseas assembly facilities in selected markets. In a sense, the establishment. of an assembly operation represents a cross between exporting and overseas manufacturing. Having assembly facilities in foreign markets is very ideal when there are economies of scale in he manufacture of parts and components and when assembly operations are labour intensive, and labour is cheap in the foreign country. It may be noted that a number of U.S. manufacturers ship the parts and components to the developing countries, get the product assembled there and bring it back home. The U.S. tariff law also encourages this. Thus, even products meant to be marketed domestically are assembled abroad. Assembling the product meant for the foreign market in the foreign market itself has certain other advantages, besides the cost advantage. The import duty is normally low on parts and components than on the finished product. Assembly operations would satisfy the ‘local content’ demand, at least to some extent. Because of the employment generation, the foreign government’s attitude will be more favourable than towards the import of the finished product. Another advantage is that the investment to be made in the foreign country is very small in comparison with that required for establishing complete manufacturing facilities. The political risks of foreign investment is, thus, not much. t Ventures t venture is a very common strategy of entering the foreign market. In the widest sense, any form of association which implies collaboration for more than a transitory period is a t venture (pure trading operations are not included in this concept). Such a broad definition encomes many diverse types of t overseas operations, viz, 1. Sharing of ownership and management in an enterprise. 2. Licensing/franchising agreements. 3. Contract manufacturing. 4. Management contracts. Three of the above have already been discussed in the preceding sections. The following paragraphs are confined to the first category referred to above, i.e. t ownership ventures. What is often meant by the term t venture is t ownership venture. The essential feature of a t ownership venture is that the ownership and management are shared between a foreign firm and a local firm. In some cases there are more than two parties involved. A t ownership venture may be brought about by a foreign investor buying an interest in a local company, a local firm
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Management contracts have disadvantages under certain conditions. As Kotler observes, the arrangement is not sensible if the company can put its scarce management talent to better use, or if there are greater profits to be made by undertaking the whole venture. Management contract may prevent a company from setting up its own operations for a particular period.
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acquiring an interest in an existing foreign firm or by both the foreign and local entrepreneurs tly forming a new enterprise.
Countries. In the past, government of India did not permit trade with South Africa and Mauritius.
It is also common practice to split the local interest between a partner and various public participation (including public sector firms or industrial development organisations). Such a strategy may enable the international firm to retain much control despite a minority holding as the power of the remaining shares is spread out. Further, equity holding by the public would help the enterprise get some public . Partnership with government organisation may help to obtain favourable treatment from the government.
Sometimes commercial reasons encourage third country location. For example, several Japanese companies established production facilities in developing countries to circumvent the non-tariff barriers (like quotas, voluntary export restraints and orderly marketing arrangement) to imports to countries like the United States and also to avail of the preferential treatment accorded by the developed countries to the imports from the developing countries.
In countries where fully foreign owned firms are not allowed or favoured, t venture is the alternative if the international marketer is interested in establishing an enterprise in the foreign market. Many foreign companies entered the communist, socialist and other developing countries by t venturing. One important advantage of t venturing is that it permits a firm with limited resources to enter more foreign markets than might be possible under a policy of forming wholly owned subsidiaries. In some cases, it is also possible to swap know-how (such as patent rights for equity) in forming t venture as a means of securing ownership in foreign operations. Partnership with local firms has certain specific advantages. The local partner would be in a better position to deal with the government and the publics. Further, there would not be much public hostility when there is a local partner; it would be much less when there is equity holding by the government sector and the public. A right local partner for a t venture can have a major impact on a firm’s competitiveness because such a partner can serve as a cultural bridge between the manufacturer and the market. For example, several successful foreign d companies have demonstrated how the right partnership can strongly enhance a firm’s competitive edge and. its ability to adapt to and cope with the idiosyncrasies of the Japanese market. A t venture can succeed only if both the partners have something definite to offer to the advantage of the other, and reap definite advantages, and have mutual trust and respect. Third Country Location Third country location is sometimes used as an entry strategy. When there are no commercial transactions between two nations because of political reasons or when direct transactions between two nations are difficult due to political reasons or the like, a firm in one of these nations which wants to enter the other market will have to operate from a third country base. For example, Taiwanese entrepreneurs found it easy to enter People’s Republic of China through bases in Hong Kong.
Further, third country location may be resorted to reduce cost of production and thereby to increase price competitiveness to facilitate market entry or for improving/maintaining the market position. The incentives offered by governments, particularly of the developing countries, for investment and exports encourage such third country location. The export processing zones are particularly attractive in this respect. Mergers and Acquisitions Mergers and acquisitions (M & A) have been a very important market entry strategy as well as expansion strategy. A number of Indian companies have also used this entry strategy. Mergers and acquisitions have certain specific advantages: It provides instant access to markets and distribution network. As one of the most difficult areas in international marketing is the distribution, this is often a very important consideration for M & A. Another important objective of M and A is to obtain access to new technology or a patent right. M and A also has the advantage of reducing the competition. Mergers and acquisitions may also give rise to some problems which arise mostly because of the deficiencies of the evaluation of the case for acquisition. Sometimes the cost of acquisition may be unrealistically high. Further, when a enterprise is taken over, air its problems are also acquired with it. The success of the enterprise will naturally depend on the success in solving the problems. See the section Cross-border M&As in the Chapter on International Investments for mote information. Strategic Alliance Strategic alliance has been becoming more and more popular in international business. Also known by such names as entente and coalition, this strategy seeks to enhance the long term competitive advantage of the firm by forming alliance with its competitors, existing or potential in critical areas, ‘instead of competing with each other. “The goals are to leverage critical capabilities, increase the flow of innovation and increase flexibility in responding to market and technological changes.”
Third country location may also be helpful to take advantage of toe friendly trade relations between the third country and the foreign market concerned. Thus, for example, Rank Xerox found it convenient to enter the erstwhile USSR through its Indian t venture Modi Xerox.
Strategic alliance is also sometimes used as a market entry strategy. For example, a firm may enter a foreign market by forming an alliance with a firm in the foreign market for marketing or distributing the former’s products. A U.S. pharmaceutical firm may use the sales promotion and distribution infrastructure of a Japanese pharmaceutical firm to sell its products in Japan. In return, the Japanese firm can use the same strategy for the sale of its products in the U.S. market.
There are several cases of countries not having direct commercial transactions. For example, it was true of Israel and Arab
Strategic alliance, more than an entry strategy, is a competitive strategy. -
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1. Technology development alliances like research consortia, simultaneous engineering agreements, licensing or t development agreements. 2. Marketing, sales and service alliances in which a company makes use of the marketing infrastructure etc., of another company, in the foreign market, for its products. This may help easy penetration of the foreign market and preemption of potential competitors. 3. Multiple activity alliance which involves the combining of two or more types of alliances. While marketing alliances are often single country alliances, as international firms take on different allies in each country, technology development and operations alliances are usually multi-country since these kinds of activities can be employed over several countries. 4. Multiple activity alliance involves the combining of two or more types of alliances. While marketing alliances are often single country alliances, as international firms take on different allies in each country, technology development and operations alliances are usually multi-country since these kinds of activities can be employed over several countries. Strategic alliances also differ according to how they are structured. They can be equity based (t ventures) or non-equity based. Non-equity based alliances such as technology transfer agreements, licensing agreements, marketing agreements etc., are proving to be more dynamic, more constructive and more strategic, according to Magsaysay. As indicated above, several areas of business - from Rand D to distribution - provide scope for alliance. Whether it is in R and D, manufacturing or marketing, an important objective of the collaboration is to maximise marginal contribution to fixed cost. Countertrade Although the major reason for the substantial growth of counter trade is its use as a strategy to increase exports, particularly by the developing countries, countertrade has been successfully used by a number of companies as an entry strategy. For example, Pepsi Co, gained entry to the USSR by employing this strategy. Countertrade is a form of international trade in which certain export and import transactions are directly linked with each other and in which import of goods are paid for by export of goods, instead of money payments. In the modern economies, most transactions involve monetary payments and receipts, either immediate or deferred. As against this, “countertrade refers to a variety of unconventional international trade practices which link exchange of goods directly or indirectly - in an attempt to dispense with currency transactions.” Forms of Countertrade: Countertrade takes several forms. The following are the most common among them.
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Barter: Barter refers to direct exchange of goods of equal value, with no money and no third arty involved in it. For example, a countertrade deal between the Minerals and Metals Trading corporation of India (MMTC) and a Yugoslavian company involved import of 50, 000 tonnes of rails of the value of about $ 38 million by the MMTC and the purchase by the Yugoslavian company of iron ore concentrates and pellets of the same value. Buy Back: Under the buy back agreement, the supplier of plant, equipment or technology agrees to purchase goods manufactured with that equipment, or technology. Under the buy back scheme, the full payment may be made in kind or a part may be made in kind and the balance in cash. Thus, a Rs. 20 corer buy back agreement with the Soviet Union provided for the import of 200 sophisticated looms by the National Textiles Corporation. The buy back ratio was 75 per cent. Compensation Deal: Under this arrangement, the seller receives a part of the payment in cash and the rest in products. Counterpurchase: Under the counterpurchase agreement the seller receives the full payment in cash but agrees to spend an equivalent am punt of money in that country within a specified period. A classic example of this kind of an agreement was Pepsi Cola’s trade with the USSR. Pepsi Cola at paid in Rubles for the sale of its concentrates in the USSR but spent this amount for purchase of Russian products like Vodka and wine. Countertrade has been growing with government patronage It may be noted that the South commission has advocated countertrade as a useful mechanism for overcoming, difficulties of payments, export credit, and foreign exchange which might otherwise be serious obstacles to the expansion of trade between developing countries. As the Commission points out, so far the bulk of countertrade between developing countries has been conducted mostly through intermediaries in the industrial countries. It is the developed countries who have benefited most form this type of trade de, and they obviously have no interest in helping the indirect trailing partners in the LCDs to establish direct s and develop durable trading relationships. Therefore, the developing countries need to organize themselves of countertrade as this can also pave the way for the growth of more conventional trading relations. Reasons for the Growth of Countertrade: There have been several reasons for the countertrade to become popular. Obviously, the countries or companies concerned have encouraged or involved in countertrade due to certain specific advantages, although some of the benefits may be purely temporary. 1. Countertrade was very common between the communist countries. It also became popular in respect of trade between the Communist Block and many developing countries because many developing countries were eagerly looking towards this block for increasing their exports, among other things, and this naturally led to the acceptance of the trade practice preferred by these centrally planned economies. 2. Countertrade became popular in the East-West trade mainly due to the foreign exchange problems faced by the East Block. Pepsi Cola is just one example of a multinational
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INTERNATIONAL BUSINESS MANAGEMENT
There are different types of alliances according to purpose or structure. Based on the description of the generic forms of coalitions by Michael Porter ‘and Mark Fuller, Magsaysay classifies alliances according to purpose as follows.
INTERNATIONAL BUSINESS MANAGEMENT
corporation which made considerable international business with the USSR by countertrade. 3. When the foreign exchange problem became more severe for the developing countries following the oil price hikes, they began to actively pursue countertrade in a frantic bid to increase their exports by all means. 4. Many companies in the advanced countries have resorted to countertrade for various reasons like selling obsolete products, increasing the sale of capital goods, increasing the aggregate business etc. Countertrade has also been resorted to by several companies to mitigate the effects of recession. Such recessionary situations in the capital goods industries in the advanced countries gave the developing countries an opportunity to push their exports by tying the imports of capital goods with exports by countertrade. 5. The results of the above survey also suggest that countertrade enables firms to penetrate difficult markets, to increase sales volume and to achieve fuller capacity utilisation. It has also been revealed that countertrade enables firms to dispose of declining products, which is particularly important given the very rapid pace of technological advance. 6. Some countries have also made the countertrade a means to increase sales through disguised undercutting of the cartel prices (for example, the oil price fixed by the OPEC). 7. Having realised the potential of increasing the business by engaging in countertrade, many international trading corporations became active in the countertrade. Their trading with many countries enabled them even to take up such complex transactions as the case of Daimler Benz cited earlier. Drawbacks Although counter trade has several justifications, particularly in the short run, it suffers from a number of disadvantages and problems, particularly in the long run. Firstly, countertrade encourages bilateralism at the expense of multilateralism. Secondly, it adversely affects export market development. Thirdly, although several developing countries regard countertrade as an easy route to export, they often stand to lose in of price. For instance, Poland bought Libyan oil at a discount and sold it at a higher price on the Rotterdam spot market. Fourthly, it very adversely affects competition. Activity: - (Questions)
Q1) Explain in detail the pros and cons of globalization? Q2) What are the different strategies businesses follow to enter foreign markets?
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