Modes of International trade

Modes of International trade

INTRODUCTION

When an organization has made a decision to enter an overseas market, there are a variety of options open to it.

These options vary with cost, risk & the degree of control which can be exercised over them.

One of the most important strategic decisions in international business is the mode of entering the foreign market.

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MARKET ENTRY STRATEGIESEXPORTINGFRANCHISINGLICENSINGJOINT VENTURINGCOUNTERTRADETURNKEY CONTRACTSCONTRACT MANUFACTURINGMERGERS & ACQUISITIONSTHIRD COUNTRY LOCATION

Exporting Exporting is the most traditional and well established form of operating in foreign markets.

Exporting can be defined as the marketing of goods produced in one country into another.

Whilst no direct manufacturing is required in an overseas country, significant investments in marketing are required.

The tendency may be not to obtain as much detailed marketing information as compared to manufacturing in marketing country.

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Exporting methods include direct or indirect export.

In direct exporting the organization may use an agent, distributor, or overseas subsidiary, or act via a Government agency.

Indirect methods offer :* Contracts - in the operating market or worldwide* Commission states give high motivation (not necessarily loyalty)* Manufacturer/exporter needs little expertise* Credit acceptance takes burden from manufacturer.

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advantages of exporting Manufacturing is home based thus, it is less risky than overseas basedGives an opportunity to "learn" overseas markets before investing in bricks and mortarReduces the potential risks of operating overseas.

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disadvantages of exportingThe disadvantage is mainly that one can be at the "mercy" of overseas agents and so the lack of control has to be weighed against the advantages.

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FRANCHISING

Players : Franchisor & Franchisee.In terms of distribution, the franchisor is a supplier who allows an operator, or a franchisee, to use the supplier's trademark and distribute the supplier's goods. In return, the operator pays the supplier a fee.Thirty three countries, including the United States, and Australia, have laws that regulate franchising.Franchisingis the practice of using another firm's successfulbusiness model.

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For the franchisor, the franchise is an alternative to building Chain Stores to distribute goods that avoids the investments and liability of a chain.

The franchisor's success depends on the success of the franchisees.

The franchisee is said to have a greater incentive than a direct employee because he or she has a direct stake in the business.

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examples

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advantages of franchising Freedom of EmploymentProven products & ServicesProven Trade MarkReduced Risk of Failure

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LICENSING

Licensing is defined as "the method of foreign operation whereby a firm in one country agrees to permit a company in another country to use the manufacturing, processing, trademark, know-how or some other skill provided by the licensor".

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Licensing involves little expense and involvement. The only cost is signing the agreement and policing its implementation.It is quite similar to the "franchise" operation.Coca Cola is an excellent example of licensing.

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Advantages of Licensing.

Good way to start in foreign operations and open the door to low risk manufacturing relationshipsLinkage of parent and receiving partner interests means both get most out of marketing effortCapital not tied up in foreign operation andOptions to buy into partner exist or provision to take royalties in stock

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Disadvantages of Licensing.

Limited form of participation - to length of agreement, specific product, process or trademark.Potential returns from marketing and manufacturing may be lost.

Partner develops know-how and so license is short.Licensees become competitors - overcome by having cross technology transfer deals andRequires considerable fact finding, planning, investigation and interpretation.

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JOINT VENTURES

Joint ventures can be defined as "an enterprise in which two or more investors share ownership and control over property rights and operation."

It is a very common strategy of entering the foreign market.

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Any form of association which implies collaboration for more than a transitory period is a joint venture.

A joint venture may be brought about by a foreign investor showing an interest in local company,

A local firm acquiring an interest in an existing foreign firm or

By both the foreign and local entrepreneurs jointly forming a new enterprise.

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Advantages of joint venture

Sharing of RISK. Joint financial strength.May be only means of entry in some countries.

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Disadvantages of joint venture

Partners do not have full control of management.May be impossible to recover capital if need be.Partners may have different views on expected benefits.

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examples

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COUNTER TRADELargest indirect method of exporting is countertrade.

Countertrade means exchanging goods or services which are paid for, in whole or part, with other goods or services, rather than with money. A monetary valuation can however be used in counter trade for accounting purposes.

Countertrade also occurs when countries lack sufficient hard currency, or when other types of market trade are impossible.In 2000, India and Iraq agreed on an "oil for wheat and rice" barter deal.

Countertrade is a system of international trading that helps governments reduce imbalances in trade between them and other countries. It involves the direct or indirect exchange of goods for other goods instead of currency.

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TURNKEY CONTRACTS

An agreement under which a contractor completes a project, then hands it over in fully operational form to the client, which needs to do nothing but ""turn a key"", here the constructor builds an item to the buyer's exact specifications, or when an incomplete product is sold with the assumption that the buyer would complete it.

Many turnkey contracts involve government/public sector as buyer.

A turnkey contractor may subcontract different phases/parts of the project.

The advantage of a turnkey project is that a single contractor oversees all aspects of construction from beginning to end.

CONTRACT MANUFACTURINGContract manufacturing is the outsourcing of part of the manufacturing process of a product to a third-party. A company may outsource the manufacture of certain components for the product or outsource the assembly of the product.

Why would a company opt for contract manufacturing?

Advantage-Manufacturers can save significant money on labor, materials and other expenses related to production.

DisadvantagesContract manufacturing does have disadvantages for the company, the foreign employees, and the company's domestic economy. Since 2001, the United States has outsourced millions of manufacturing jobs, which has resulted in a great deal of job displacement for many Americans, who may never find a replacement job with similar wages and benefits.the company outsourcing the work does give up some control of the manufacture of its products.

THIRD COUNTRY LOCATIONThis is sometimes used as an entry strategy. When there is no commercial transaction between 2 nations because of political reasons, or when direct transactions between 2 nations are difficult & if one nation wants to enter other nation, then the nation will have to operate from the third country base.It may be helpful to take advantage of the friendly trade relations between the third party & the foreign market concerned.

Advantages

Increasing the market power.Acquisition of Technology.Optimum utilization of Resources.Minimization of Risks.Tax Benefits

MERGERS & ACQUISITIONSThis strategy is also known as an expansion strategy.M&As have been imp & powerful driver of globalization.Between 1980 2000 the value of cross border grew at an average annual rate of 40%.A large no. of foreign firms have entered India through acquisition.Example: Automobiles, Pharmacy, banking, telecom etc.

The value of global mergers and acquisitions deals reached 3.23 trillion U.S. dollars in 2014. In that year, the United States proved to be the largest M&A market worldwide.As far as the industry sectors are concerned, the highest value of M&A deals that was signed in the technology, media & telecommunications sector.

Thank you

Presented by : Pooja Tayal Aditi Ray