Factors and Issues That Are Faced for Making the Choice of the Mode of International Market Entry - Term Paper Example

? | Word Limit 2000 24/06 Assignment Topic: FDI mode of internationalization Candi number: Candi mentI hereby declare that this assignment is my own work and any use of materials from other sources has been referenced accordingly. Candidate Signature: Date: Tutor Statement I hereby confirm that this assignment, to the best of my knowledge, is the candidates own work and they have not collaborated in the production of this assignment with any other person. I also confirm that I have a record of this candidate’s progress tutorial/s. Tutor Signature: Date: Table of Contents Table of Contents 3 Introduction 4 Foreign market entry modes 4 FDI (Foreign Direct Investment) 4 Exporting 4 Licensing or Franchising 5 Circumstances under which FDI is beneficial over exporting 5 Circumstances under which FDI is beneficial over licensing or franchising 6 Conclusion 7 Introduction Organizations or firms that operate in the international market place are required to make decisions that are related to the mode of entry in the international market place or foreign market. The following paper includes the discussion about the factors and issues that are faced for making the choice of the mode of international market entry. The organizations needs to analyze the potential factors and issues that impact the organization by selecting a particular mode of going international. Mainly the mode of going international includes the FDI (Foreign Direct Investments), franchising or licensing and exporting. The paper includes the factors or circumstances under which the organizations must prefer to internationalize via foreign direct investment rather than the other modes of internationalizations. Foreign market entry modes The modes to enter the foreign market differs with the degree of risk they present, the level of control and the commitment of resources the mode of internationalization require and also the return on investment they provide. There are different modes through which organizations can internationalize their business this mainly includes FDI, franchising or licensing and exporting (Stiglitz 2006). Each mode has certain advantages and disadvantages, which needs to be evaluated before selecting a mode of internationalization for business. The whole entry mode is divided into equity modes and non equity modes. The equity modes include FDI’S, joint ventures etc, while the non equity modes include exporting, franchising, or licensing etc (Bakan 2007). FDI (Foreign Direct Investment) In simple terms FDI can be defined as the investment process where residents of one nation or country acquire ownership of assets of the firm in some other country or nation for the purpose of controlling interest in the production, distribution and other activities. It can also be said to be as the acquisition of lasting interest in a firm operating in an economy other than the home economy or of the investor in order to have a hold in the management of the enterprise (Ravenhill 2008). The major factors explained in the definitions above include controlling interest. So the main factor that is included for the use of the FDI as a source of international investment over other modes of internationalization is the element of control on the policies and decisions of management (Zekiri and Angelova 2011). Exporting Exporting in simple terms can be said to be as the process of selling of goods and products or services produced in domestic country to other country. Exporting is done in the form of direct and indirect exporting. In indirect exporting the products are sold in the original or modified form from one nation to another, while in direct exporting includes selling of products and services directly through the use of direct distribution channels (Mosa 2012). Licensing or Franchising Under the franchising internationalization mode the organizations sells limited rights to the franchisees to utilize the brand name of the organization in return for a lump sum amount of payment and also with the agreement to provide a share in the franchisees profitability (The Drive to Internationalize 2004). In simple terms the franchising can be said to be as making use of the other firm’s successful business model. This mainly includes opening of chain stores and the distribution of goods and services that avoids the liability of investment of the store and the chain. The success of the franchisor or organization depends on how the franchise operates the business practices (Svetlicic and Rojec 2003). Circumstances under which FDI is beneficial over exporting There are several circumstances under which the organizations need to use the FDI mode of investment rather than using the export mode to enter the international market place. Mainly the FDI mode is used over exporting when it becomes difficult to identify the needs of the customers as using the FDI mode helps in using the existing customer base and acquiring an already established setup of business and customer base (Miozzo and Miles 2002). When the organizations also finds difficulty to handle or manage the local distributors to distribute the products in the international market the FDI investment is the most desirable mode of internationalization as it provides already existing distributors base which helps in effectively expanding the business and also does not require to establish a new distribution channel in another country which is the most difficult task (Kumar and Siddharthan 1997). FDI investment is also desirable over the exporting because selection of the local distributors is difficult and also it becomes difficult to split the profits with the local organizations and this leads to the differences in the motivation level and the time horizon as well. The cost of warehousing and logistical expenses is also very high in case of the exports. There are several other disadvantages of exports as well this includes, the difficult arrangement of distribution channel, longer supply chains, transportation problems and communication problems etc (Lukac 2008). The barriers to entry or exports in some nations are also one of the crucial factors for the selection of the FDI investment for going international. In several nations there are certain barrier to exporting activities to these nations under such circumstances the organizations are left with the option to enter the nation by the way of FDI investment which provides the organizations an easy access to do business in that country and also provides an established setup of production as well as sales force and distribution channel (Marinov 2003). When the firms want to capture the potential market and reach a established market place in that circumstances the organizations seeks to use the FDI mode of internationalization because the use of export to enter the market is highly time consuming because a whole network of organizations and distribution channel needs to be established. The firms also face certain risks in exporting this mainly includes, extra costs incurred for selling products in foreign markets, product modifications, financial risks, exporting licences and documentation which requires ample time for approval and gathering market information which is vital for the success of any business (Grunig and Morschett 2012). By the use of FDI the company or organizations get direct or ready market and customer base and also the established distribution and financial channel which the company just need to manage as per their management actions and will. FDI is also used over the exports because organizations are faced with several trade barriers several times. The trade barriers include excessive government laws, policies and procedures for protecting the domestic products from facing foreign competition and thus stimulate exports for several domestic products (Hunya 2000). There are several restrictive business practices related to products and services which are not allowed to enter other countries so under these circumstances the organizations have to enter the international market by using the foreign direct investment mode. There are certain international agreement in between the nations which restricts the trade in between these nations and thus force organizations to use FDI instead of using the export mode of internationalization. The FDI investment is also preferred at times when there is a high rate of tariff or taxes imposed on the export of goods to other countries related to some specific products and services (Stonehouse and Campbell 2004). Circumstances under which FDI is beneficial over licensing or franchising There are several circumstances under which selection of FDI investments for the purpose of internationalization is better then selecting the franchising or licensing mode. The main factor that makes the use of FDI over the franchising is that the access to foreign market is constrained by the franchising. The organization is bound by the contract terms and conditions. It is also of the concern that licences may not perform up to the level of expectations (Gionea 2011). There are several circumstances under which franchising becomes difficult because for a new firm to start the franchising they need to establish it in the local market and this will include a large part of the time of the business and thus is not a lucrative business internationalisation option. The main difficulty with the franchising is that the profit needs to be shared and this decreases the share and percentage of profit of the business due to which organizations mostly opt for FDI’S. Franchising and licensing also includes greater financial commitment even this is required in FDI as well but FDI provides the control on the firm undertaken (Goldman and Nieuwenhuizen 2008). Franchising is also highly complicated as compared to the FDI investment as this includes more responsibilities and greater commitment towards the foreign firms and does not have enough control over the foreign partner. If organization who is aspiring for going international and has the potential to have a control on the firm they must opt for FDI investments instead of franchising and licensing because FDI includes better control and power over the acquired firm and have authority in the management decisions. The franchiser of the firm is highly concerned about the quality control aspects which are also the condition which needs to be looked upon when planning for internationalization (Lukac 2008). The organizations which does not aspire for certain responsibilities and issues related to quality control must go for the FDI investment. FDI investments are also advantages in the circumstances under which the organization required more control on its foreign operations. FDI investment is also advantageous over the franchising when the organization has the better understanding of the host market and can effectively grow the acquired organization established market place. FDI is also advantageous as it is easy to adopt products for the markets and respond to the changes in the market demand factors (Stonehouse and Campbell 2004). There are several other circumstances other than described above under which the FDI is preferred over the franchising of the business practices. This mainly includes the business which requires high production requirements and has less retail business activities like steel plants production of machinery parts and equipments. Under these kind of businesses the organizations must take decisions to overtake firms by the way of FDI investments and start business practices in short span of time, as these business cannot use the franchising and licensing mode of internationalization. The decision related to the type of ownership is also vital for the selection of the mode of internationalisation and the expectation to have a high control on the business activities makes it to judge the FDI mode of internationalization as compared to franchising or licensing (Lukac 2008). Conclusion From the above analysis it can be concluded that there are several modes through which an organization can go international. The main modes include the foreign direct investment (FDI), franchising, licensing and so on. It can also be concluded that there are several circumstances under which the organizations have to take decision to select the FDI mode of internationalisation as compared to opting for exporting, licensing or franchising. The circumstances includes the concentration of power to hold the management decision, under this condition the organization can only go for FDI investments and gather the hold on the organizational activities and decisions. It can also be concluded that there are also condition in which it become difficult to use the franchising mode of internationalization because of the type of business activity like in case of production of steel or iron or some manufacturing of equipments franchising becomes difficult. Under the circumstances when there are certain trade barriers related to exporting the organizations under those circumstances also need to go with the FDI investments. References Bakan, J. 2007. The Corporation. ESENSI. Gionea, 2011. International Trade & Inv. McGraw-Hill Education. Goldman, G. and Nieuwenhuizen, C. 2008. Strategy: Sustaining Competitive Advantage in a Globalised Context. Juta and Company Ltd. Grunig, R. and Morschett, D. 2012. Developing International Strategies: Going and Being International for Medium-Sized Companies. Springer. Hunya, G. 2000. Integration Through Foreign Direct Investment: Making Central European Industries Competitive. Edward Elgar Publishing. 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