International Business Rakesh MOhan

1
International Business
Rakesh Mohan Joshi
Professor & Chairperson, IIFT New Delhi
Copyright @ Oxford University Press Chapter 11: Modes of International

International Business R. M. Joshi Business Expansion
Chapter 11
MODES OF
INTERNATIONAL
BUSINESS EXPANSION

Learning Objectives
To explain the concept of expansion modes for

international business
To examine strategic trade-offs in selecting
expansion modes
To discuss trade-related expansion modes
To evaluate contractual expansion modes
To elucidate investment modes of expansion
To explicate strategy for selecting the expansion
modes
To elaborate the decision making process for
selecting the expansion modes

Modes of International Business
Expansion
These are specific forms of entering a foreign
country so as to have international presence and
achieve firms strategic goals.
Mode of international business expansion is an
institutional mechanism by which a firm expands
its operations overseas.
Modes of expansion have also been referred to as
entry modes in the international business
literature.
Factors Affecting Strategic Trade-offs in
Selecting an Expansion Mode
Ability and willingness to commit resources in the
target country
Magnitude of risk the firm is willing to take in its
international expansion
Types of return anticipated from overseas
operations
Extent of control to be exerted in firms foreign
operations
Level of externalisation of firms resources
including its intellectual property
Desired flexibility of expansion modes
Trade Related Modes
Expansion modes that employ some form of
trade to expand business in foreign
countries.
Trade related modes are low- risk expansion

modes, highly suitable for simultaneous
expansion in geographically diverse
countries.

Exports
Manufacturing the goods in the home
country or a third country and shipping
them for sales to a country other than the
country of production.
Export is the most common initial mode of

entry into foreign markets as it involves
much lower risks and is a low cost and
simple mode of entry.
Indirect Exports
Selling through an export intermediary
based in its home country and does not
take care of export activity.
In indirect exports, the firm is not required
to deal with hassles of export operations,
it need little international experience, and
much less resource commitment.
Indirect exports may take place either
through home based agents or through
merchant intermediaries.

Agents
Agents do not take the title of the goods and

operate on behalf of principal firms, rather than
themselves on commission basis.
Types of Export Agents
Importers buying agents
Country-controlled buying agents
Buying offices

Merchant Intermediaries
Exports intermediaries that buy and sell
goods for a profit and take title of the goods
and assume risks thereof.

Merchant Exporters
They collect produce from several
manufacturers or producers, export
directly in their own name and work on
profit margins.

International Trading Companies
Generally large companies that accumulate,
transport, and distribute goods in various
markets.
Trading companies have been operating for
centuries as pioneers of international trade.

Trading/Export Houses
Home-country based firms involved in
international trading activities that serve as
merchant intermediary for exports.
As a part of export development strategies,
most countries facilitate such
trading/exports houses.

Direct Exports
Making domestically produced products
available in foreign markets without
employing any market intermediary in the
home county. It does not mean that the
goods are sold directly to foreign-based end
customers.
Manufacturers Export Agents or Sales Representatives
The individual intermediaries who operate on a

commission basis and travel frequently to overseas
markets and carry out business in the name of the
firm rather than in their own name.
These agents specialize in one or a few countries

and offer their services to a number of
manufacturers for non-competing products.

Overseas-based Buying Agents
Foreign based agents that have exclusive
contract arrangements to perform the
exporting firms business, generally paid on
the basis of a specific percentage of profit
and the cost incurred.

Merchant importers
An overseas-based trader who imports

products and further sells these to a
wholesaler or a retailer for a profit.
Merchant importers take possession and title
of the goods, therefore assuming risks and
responsibilities thereof..

Distributors
The overseas distributors purchase the

goods and subsequently sell them
either to a market intermediary or to
the ultimate customer. The distributors
have contractual agreements with the
exporting manufacturers and deal with
them on a long-term basis.

Piggybacking (Complementary Exports)
Use of well-established distribution network
of another company in foreign country.

Counter-Trade
Various forms of trade arrangements
wherein the payment is in form of
reciprocal commitments for other goods
or services rather than an exclusive cash
transaction. In addition, trade financing
and price-setting are tied together in a
single transaction.

Forms of Counter-Trade
Simple barter:
Direct and simultaneous
exchange of goods without use of money.
Clearing arrangement: The transaction of
goods and services that extends an agreed period
of time.
Switch trading: Trading involving a third party,
known as switch trader in the transaction to
facilitate buying of unwanted goods from the
importer and make payment by cash or barter to
the exporter.
Counter purchase:
A deal involving two
separate transactions payable in hard currency,
each with its own cash value.
Buyback: Often used as a marketing tool to sell
plant and equipment wherein the payment is
recovered by way of output from plant and
equipment sold.
Offset: Partial payment is made by the importer
in hard currency, besides promising to source
inputs from the importing country and also make
investment to facilitate production of such goods.

e-Modes of Business Expansion
Use of information and communication
technology for expanding business
internationally.

Contractual Modes of Business
Expansion
Making use of strategic strengths and
resources of a foreign-based partner
company for international business
expansion.
In contractual expansion modes, the partner
firms complement each other with one or
more of their strategic strengths, such as
superior technology, strong brand equity,
manufacturing facilities, well-established
distribution network, etc.
International Strategic Alliance
Cooperation with one or more than one firm
overseas to carry out a business activity
wherein each one contributes its different
capabilities and strengths to the alliance.

International Contract Manufacturing
A contractual arrangement under which a
firms manufacturing operations are carried
out in foreign countries.

International Management Contracts
Providing managerial and technical expertise
to an overseas firm on contractual basis.

International Turnkey Project
Conceptualizing, designing, constructing,
installing, and carrying out preliminary
testing of manufacturing facilities or
engineering projects at overseas locations
for a client organization.

International Leasing
Making available new and used equipment
through a foreign-based firm for use, in
return of a fee called leasing fee.

International Licensing
Making available intangible assets to a

foreign company, such as patents,
trademarks and copyrights, technical know-
how and skills (technical guidance, feasibility
and product studies, manuals) engineering,
designs, etc., for a fee termed as royalty.

Major Types of Licensing Arrangements
Process licensing
Trade-mark licensing
Cross-licensing

International Franchising
A special form of licensing in which
intangible assets are transferred to a foreign
firm alongwith methods of doing business in
a prescribed manner and other assistance
over an extended period of time in return for
a franchising fee.

Investment Modes of Business
Expansion
If a country is found attractive enough to
justify a firms long-term commitment,
investment modes of expansion are often
adopted.

Overseas Assembly
Exports of components, parts or machinery
in CKD condition and assembling these parts
at a site in a foreign country.

International Joint Venture
Equity participation of two or more firms
resulting in formation of a new entity.

Wholly Owned Subsidiary
Setting up a fully owned new entity in a
foreign country.

Greenfield Operations
Creating production and marketing facilities
on a firms own from scratch.

Mergers and Acquisitions
Transfer of existing assets of a domestic firm to a
foreign firm lead to mergers and acquisitions.
Cross-border mergers: a new legal entity

emerges by way of merging assets and
operations of firms from more than one country.
Cross-border acquisition: involves transferring

management control of assets and operations of
a domestic company to a foreign firm. As a result
the local firm becomes an affiliate of the foreign
company.
Strategy for Selecting International
Business Expansion Mode
Nave rule
Pragmatic rule
Strategy rule

Marketing Strategy and Expansion
Modes
Market penetration strategy: When a
firm focuses itself on a select few countries.
Market-skimming strategy: When a firm

either simultaneously or in quick succession
enters a large number of countries.

Sequential Adoption of Business
Expansion Modes
Platform countries: eg. Singapore and Hong
Kong
Emerging countries: eg. Vietnam, Myanmar,
Laos, and Cambodia
Growth countries: eg. China, India,
Thailand, Indonesia, Malaysia, and
Philippines
Maturing countries: eg. Korea and Taiwan
Established countries: eg. Japan
Decision-Making Process for Selecting
Modes of International Business
Expansion
The expansion mode strategy should aim
at achieving a firms strategic goals. It
should aim at optimal harnessing of a
firms core competencies by way of
international expansion.


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1

Copyright @ Oxford University Press Chapter 11: Modes of International

Copyright @ Oxford University Press Chapter 11: Modes of International

To explain the concept of expansion modes for

Copyright @ Oxford University Press Chapter 11: Modes of International

Trade related modes are low- risk expansion

Copyright @ Oxford University Press Chapter 11: Modes of International

Export is the most common initial mode of

Copyright @ Oxford University Press Chapter 11: Modes of International

Agents do not take the title of the goods and

Country-controlled buying agents

Copyright @ Oxford University Press Chapter 11: Modes of International

Exports intermediaries that buy and sell

goods for a profit and take title of the goods

and assume risks thereof.

Copyright @ Oxford University Press Chapter 11: Modes of International

They collect produce from several

manufacturers or producers, export

directly in their own name and work on

Copyright @ Oxford University Press Chapter 11: Modes of International

Generally large companies that accumulate,

transport, and distribute goods in various

Trading companies have been operating for

centuries as pioneers of international trade.

Copyright @ Oxford University Press Chapter 11: Modes of International

international trading activities that serve as

merchant intermediary for exports.

As a part of export development strategies,

most countries facilitate such

Copyright @ Oxford University Press Chapter 11: Modes of International

Making domestically produced products

available in foreign markets without

employing any market intermediary in the

home county. It does not mean that the

goods are sold directly to foreign-based end

The individual intermediaries who operate on a

These agents specialize in one or a few countries

Copyright @ Oxford University Press Chapter 11: Modes of International

Foreign based agents that have exclusive

contract arrangements to perform the

exporting firms business, generally paid on

the basis of a specific percentage of profit

and the cost incurred.

Copyright @ Oxford University Press Chapter 11: Modes of International

An overseas-based trader who imports

Copyright @ Oxford University Press Chapter 11: Modes of International

The overseas distributors purchase the

Copyright @ Oxford University Press Chapter 11: Modes of International

Use of well-established distribution network

of another company in foreign country.

Copyright @ Oxford University Press Chapter 11: Modes of International

Various forms of trade arrangements

wherein the payment is in form of

reciprocal commitments for other goods

or services rather than an exclusive cash

transaction. In addition, trade financing

and price-setting are tied together in a

Copyright @ Oxford University Press Chapter 11: Modes of International

Copyright @ Oxford University Press Chapter 11: Modes of International

Use of information and communication

technology for expanding business

Copyright @ Oxford University Press Chapter 11: Modes of International

Cooperation with one or more than one firm

overseas to carry out a business activity