Discuss briefly the factors that govern the choice of mode of entry into international business.

Following factors govern the choice of mode of entry into international business, 

1. Ease of entry: First and foremost factor that determines the choice of mode of entry into international business is ease of entry. A businessman wants to adopt such mode of entry into international business which is easy and less formalities requiring. Exporting, importing, licensing and franchising are better ways from this perspective. 

2. Cost: Second determining factor is cost involved. For example, very less cost is involved in exporting, importing, licensing, franchising and contract manufacturing as compared to joint ventures and setting wholly owned subsidiaries. 

3. Control over production: If the foreign company or producer wants full control over production activities in local country, he will prefer franchising, wholly owned subsidiary or joint venture with majority share holding. If it is not so important, he will prefer exporting, importing, contract manufacturing licensing etc. 

4. Sharing of Technology: If the company has no problem in sharing of technology then it may choose joint venture or franchising. But if it does not want to share its technology and trade secrets, it will prefer wholly owned subsidiary or exporting, 5. Risk Involved: If a firm is ready to take risk, it may choose wholly owned subsidiary or joint ventures but if it is willing to minimize its loss then it should choose exporting, licensing, franchising or contract manufacturing.

The following factors govern the choice of mode of entry into international business:

(i) Ease of Entry: Some modes of entry into international business like exporting involve lesser formalities than others such as going for joint ventures, franchising or wholly owned subsidiaries. Thus, initially exporting is the mode generally adopted for the entry in to international markets.

(ii) Associated Risk:  Risk of international exposure is higher in joint ventures and wholly owned subsidiaries more investment is involved and socioeconomic conditions of the host country along with political and regulatory concerns become more important. Therefore, some other mode like licensing or contract manufacturing might be chosen to reduce risk.

(iii) Efforts Involved: Time and effort one-needs to put in’ is another factor which determines the mode international business. Mode like exporting, licensing and franchising involve lesser effort than joint venture or wholly owned subsidiary.

(iv) Degree of Control: If a firm wants to exercise full control over the operations in foreign countries; it goes for wholly owned subsidiary. Similarly, degree of control is higher in franchising as compared to licensing and so on.

(v) Nature of Business: If the business requires the firm to be in close contact with the customers in the foreign markets, wholly, owned subsidiary or joint venture’ is more suitable while if the products can be supplied from a distance, modes like exporting can suffice. The nature of products being manufactured and availability of raw material also determine the mode of entry into international business.

Mode of Entry into International Business 

1. Exporting and Importing:

When goods are sold to a foreign country, it is called export trade. When goods are purchasing from a foreign country, it is called import trade.

Advantages

• It is the easiest way of gaining entry into international markets. 
• Business firms are not required to invest that much time and money in host countries. 
• It is less risky as compared to other modes of. entry into international business 

Limitations 

• It involves additional packaging, transportation, and insurance costs. 
• Exporting is not possible in case the foreign country restricts imports. 
• The export firms do not have much contact with the foreign markets. 

2. Contract Manufacturing (Outsourcing): 

When a firm enters into a contract with one or a few local manufacturers in foreign countries to get certain goods produced as per its specifications it is called contract manufacturing. 

It is also known as outsourcing and it can take place in the following forms. 

• Production of certain components 
• Assembly of components into final products 
• Complete manufacture of the products

Advantages 

• It Permits international firms to get the goods produced on a large scale without requiring investment in setting up production facilities. 
• There is no investment risk involved in foreign countries. 
• It helps to get the products at a lower cost
• Local producers in foreign countries can ensure greater utilization of their idle production capacities.

Limitations 

• It may affect the quality of the products. 
• Local manufacturer in the foreign country loses his control over the manufacturing process because goods are produced strictly as per the terms and specifications of the contract. 
• The local firm cannot sell the contracted output as per their will.

3. Licensing and Franchising: 

Licensing is a contractual arrangement in which one firm grant access to its patents, trade secrets or technology to another firm in a foreign country for a fee called royalty. The firm that grants permission is known as licensor and the firm that receives the right to use technology or patents is called the licensee. 

Franchising is similar to licensing. But it is used in connection with the provision of services. The parent company is called the franchiser and the other party to the agreement is called franchisee. 

Advantages

• It is a less expensive mode of entering into international business. 
• There is no investment risk 
• Since the business in a foreign country is managed by the licensee/franchisee who is a local person, there are lower risks of business takeovers or government interventions. 
• Since licensee/franchisee is a local person, he has greater market knowledge and customer contacts. It helps the licensor/franchiser in successfully conducting its marketing operations.

Limitations 

• The licensee can start marketing an identical product under a slightly different brand name. 
• Trade secrets may lose in foreign markets. 
• Conflicts often develop between the licensor/ franchiser and licensee/franchisee over issues such as maintenance of accounts, payment of royalty, etc.

4. Joint Ventures: 

Joint venture means establishing a firm that is jointly owned by two or more independent firms. It can be brought into existence in three major ways.

• Foreign investors buying an interest in a local firm. 
• Local firms acquiring an interest in an existing foreign firm. 
• Both the foreign and local entrepreneurs jointly forming a new enterprise.

Advantages 

• Since the local partner also contributes to the equity capital, the international firm has less financial burden to expand the business globally. 
• It helps to execute large projects requiring huge capital outlays and manpower. 
• The foreign business firm benefits from local partner’s knowledge of the host countries. 
• The foreign business firm shares costs and risks with a local partner. So they can enter into the foreign markets very easily and without high risk.

Limitations 

• Foreign firms entering into joint ventures share the technology and trade secrets with local firms. It leads to leakage of technology and secrets to others. 
• The dual ownership arrangement may lead to conflicts. 

5. Wholly Owned Subsidiaries: 

The parent company (holding company) acquires full control over the foreign company by making 100% investment in its equity capital. It is called wholly-owned subsidiaries. It can be established in either of the two ways. i.e.

• Setting up a new firm altogether to start operations in a foreign country.  
• Acquiring an existing firm in the foreign country.

Advantages 

• The parent firm is able to exercise full control over its operations in foreign countries. 
• It is not required to disclose its technology or trade secrets to others. 

Limitations 

• It is not suitable for small and medium-sized firms that do not have enough funds to invest abroad. 
• The parent company alone has to bear the entire losses. 
• It is subject to higher political risk.