International Business Strategies and Market Entry Modes

Posted on Jan 15, 2025 in International Trade

Global Proactive Reasons for Economies of Scale

  • Resource access and cost savings, such as economic arbitrage
  • Incentives from the target country
  • Growth opportunities in mature markets

Disadvantages

  • The liability of foreignness
  • Loss of reputation
  • Loss of intellectual property

Global Strategy

A global strategy involves selling products and using similar marketing techniques worldwide. Upstream and support activities remain concentrated at the home country headquarters, unlike the transnational strategy, where value-chain activities are not necessarily located anywhere in the world.

The Global-Local Dilemma

This refers to pressures to respond to the unique needs of the markets in each country or region (a local responsiveness solution) versus efficiency pressures that encourage businesses to de-emphasize local differences and conduct business similarly throughout the world (a global integration solution).

Multidomestic Strategy

In a multidomestic strategy, the company offers products or services that attract customers by closely satisfying their cultural needs and expectations. It emphasizes local responsiveness issues. It is a form of differentiation strategy that is not limited to large multinationals, but it costs more to produce.

Transnational Strategy

This strategy involves:

  1. Seeking location advantages by dispersing the value chain where the company can do it best or cheapest.
  2. Gaining economic efficiencies from operating worldwide, such as economies of scale.

A transnational strategy is better than a global strategy if the benefits of dispersing activities worldwide offset the costs of coordinating a more complex organization. A global strategy is better than a transnational strategy if the cost savings of centralization offset the lower costs of higher-quality raw materials or labor from worldwide locations.

Departments of the Multinational Company

  1. Export department
  2. Foreign subsidiaries
  3. International division

The International Division differs from the export department in the following ways:

  1. It is responsible for managing exports, international sales, manufacturing sites, negotiating contracts, and managing a few foreign subsidiaries.
  2. It is the usual step after the export department.
  3. It is larger and has greater responsibilities.
  4. It has staff with more international expertise.
  5. It deals with all products.
  6. It is effective for companies of moderate size with a limited number of products or country locations.

Structure

  1. Worldwide geographic structure
  2. Worldwide product structure
  3. Hybrids
  4. Worldwide matrix structure

Exporting

A passive exporter is a company that treats and fills overseas orders like domestic orders.

Indirect Exporting

Intermediaries provide knowledge and contacts overseas.

  • Export Management Company (EMC): Specialized in products, countries, or regions, provide ready-made access to markets, and have networks of foreign distributors.
  • Export Trading Company (ETC): Takes title to the product before exporting.

Direct Exporting

In direct exporting, the multinational company (MNC) takes on the duties of intermediaries and makes direct contact with customers in the foreign market.

  1. It is a very aggressive exporting strategy.
  2. It requires more contact with foreign companies.
  3. It uses foreign sales representatives, distributors, or retailers.
  4. It may require its own branch offices in foreign countries.

Licensing

Licensing is a contractual agreement between a domestic licensor and a foreign licensee, which provides the easiest, least risky, and most low-cost way to go international. The licensor has a valuable patent, know-how, or trademark. The foreign licensee pays royalties for use.

  • International franchising: The franchisor grants the use of a whole business operation to the franchisee.
  • Contract manufacturing: This represents production by a firm following the foreign company’s specifications.

Disadvantages of Licensing

  1. It gives up control.
  2. It may create new competitors.
  3. Licenses often generate only low revenues.
  4. The opportunity costs would be the loss of opportunities to enter the country through other means, such as exporting or FDI.

Exporting and licensing are low-risk, but they surrender control over the product or service. FDI allows firms to maximize control but also exposes the firm to the greatest financial and political risks.