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Modes of Entry
Welcome everyone to the course International Business. In the last session, we startedwith the introduction, where we spoke about the definition of international business, theimportance of international business, and the scope and nature of it, what challengesinternational business the organizations are facing today. And then we went into theModes of Entry, how organizations, the business firms are entering into the differentcountries right!.(Refer Slide Time: 00:59)So, today we will start again with that mode of entry. So, let me just show you themodel. So, this is a picture where we have shown the different modes of entry into theinternational business. So, in the last lecture, we discussed on the (you know) this part;this is the trade related part where we spoke about the indirect way of exporting, and thedirect way of exporting.And then we talked about what is piggybacking right! where which is like (you know)strategic partnership or partnering with some other firm. And then we talked aboutcounter trade. So, counter trade again we talk about like (you know) barter, offset, buyback and all these things right! So, this is something we had covered.(Refer Slide Time: 01:38)But again let me just do for your benefit for the students benefit I have brought a chartwhere I want to explain how licensing and franchising are different from each other ok.Let us go through it. So, what is it saying? Licensing is an arrangement in which acompany sells the right! to use intellectual property or produce a company’s product tothe licensee, for a royalty, for a fee basically right!What is happening here? If you understand, the licensor is giving permission and alsosupport to set up the business, and produce and sell the products, and in return gives it afee to the licensor right! On the other hand, what happens in the franchising, it is anagreement or an arrangement in which the franchisor permits the franchisee to use thebusiness model or brand name for a fee.But the point is the franchisor gives all the support to the (you know) franchisee whichwas unlike the licensing. In the licensing the licensor was not giving any support; the allthe infrastructure was being built by the licensee right! But in the franchisee case, thefranchisor supports everything and tries to handle in a much efficient manner, so that thebrand name of the firm is not affected.What it says? The degree of control here, the licensor has control on the use of theintellectual property by the licensee, but has no control on the licensee’s business,because the licensee is setting up the infrastructure, the plant, whatever facilities, and heis (you know) running it.On the other hand, the franchisor in this case exerts considerable control over thefranchisee’s business and processes as I said because most of the time the franchisorsupports with even the infrastructure, the (you know) the trademark and all the kinds ofsupports that the franchisee needs if the franchisor supports it ok.What processes are involved? It involves a onetime transfer of property or right’s in caseof licensing. On the other hand, in case of franchising, it needs an ongoing assistancefrom the franchisor ok. So, these were some basic differences of the licensing andfranchising. So, otherwise franchising is nothing but a form of licensing only right! So,this is the first thing which we discussed in the last class. So, another type of entry,contractual mode of entry for international firms is known as management contracts.(Refer Slide Time: 04:01)So, what is management contract? Let us understand. A firm that possesses technicalskill, a firm that possesses technical skill right! or management know-how right! canexpand overseas by providing managerial and technical expertise on a contractual basis,that means, for a time period right! It has widespread acceptance in industries andcountries that lack the skill the expertise to manage their own projects.Suppose, for example, some African nation does not have the skill and expertise. So,another a company from some developed country or some good firm can take advantageof that and support the country, because it needs some guidance and this company has aability to provide it right!.Management contracts are common in the hotel industry. So, I brought an example foryou also. So, as to take advantage of economies of scale, brand equity and thereservation system for example, in hotels Another example which I have given ofmanagement contracts is Engineers India Limited (EIL), it got a project managementcontract you can look at this for providing project consultancy for the revamp andupgradation of the Skikda Refinery in Algeria.So, it is a Skikda is a refinery in Algeria in 2005. So, this contract was given to EIL. AndEIL was taking care of it because EIL had the expertise. And for upgradation of anothertank farm area in Abu Dhabi in August 2005. So, this is what is a management contract.(Refer Slide Time: 05:36)So, this is a example I have brought; you can read it in your free time how India’s TajHotel have employed management contracts for international expansion right! So, youcan read it. So, just to show you few things in here the Indian Hotels Management, theIHCL entered into a 10-year management contract with Dubai-based property developerand to develop and manage the Taj Exotica Resort and Spa right! at a luxury resort at thePalm Island in Dubai.Similarly, Indian hotels entered into a 30-year management contract to operate andmanage Piere a luxurious hotel in New York, so which was earlier managed by FourSeasons and their firm right! So, management contracts facilitated rapid internationalexpansion of Taj Hotels without any equity commitment. So, what you have is theexpertise, and you are using your expertise to run some firm who needs your expertiseright! So, that is how also firms try to (you know) enter into different countries and it is amode of entry right!(Refer Slide Time: 06:43)Another interesting form of entry into different countries is contract manufacturing.Now, what is contract manufacturing? Let us look at it. In order to take advantage oflower costs of production, a firm may subcontract manufacturing in a foreign country, Ithink you must have heard a lot about these cases in the (you know) with the attached tothe word outsourcing right! Nike outsources most of its production right!So, similarly this case of Nike also has been brought here. Nike, for example, the leadinginternational brand, shoe brand does not own a single production facility and gets itsmanufacturing done through contract manufacturing throughout the world right!So, what it is doing? They involve international subcontracting arrangements, mayinvolve supply of inputs such as raw materials, semi-finished goods, components andtechnical know-how to a local manufacturer in a foreign country, and this localmanufacturer does all the production part right!So, another example you largely see contract manufacturing is where the Indianpharmaceutical industries are connected with that. The Indian pharma industry is largelydependent on the foreign firms pharmaceutical from large firms, and they act as thecontract manufacturers. Example Ranbaxy and Lupin industries are contractmanufacturers for multinational companies like Eli Lilly and Cynamid right! So, this isan example.So, we have they need us, they need a low cost operation, and India is a very good placebecause here there are (you know) labour is cheap and technology is good, there is alarge community of English speaking people. So, they can help you in there right!(Refer Slide Time: 08:17)The next is the turnkey projects. Now, what is a turnkey project? Let us start with adefinition. It is a contract under which a firm agrees to fully design, construct and equipa manufacturing, business, service facility and give the project back to the purchaserwhen it is ready for operation in exchange for a remuneration.That means somebodywants me to do a particular commissioning of a plant, and I have the knowledgeexpertise, resources, everything. So, I do it for them, and then hand over the commissionthe plant and hand it over to them, and in exchange for a fee right!A turnkey project is way for a foreign company to export its process and technology toother countries by building a plant in that country. Now, you can see here, what it isdoing, there is a planning, procurement, engineering, construction, testing andcommissioning right! So, these five things are part of a turnkey project right!So, conceptually why it is called turnkey? Let us understand. It means handling over aproject to the client when it is complete in all respects and is ready to use on just turningthe key. So, it is like turning the key or (you know) opening the (you know) lock, it issomething like that that is why it is called a turnkey. So, everything is complete I willjust hand it over to you, and you need to pay me for that. Examples are in India are theDelhi Metro and the bullet trains right!(Refer Slide Time: 09:48)What is the process of turnkey projects and what are the advantages? So, how it ishappening you see? Tender for the project wanted, who is eligible and what is the bestcontract right! So, the contractor is applying. And then after that the selection is done andthe execution happens, and the finally, the project is delivered and executed.So, what are the advantages of this turnkey project? It is a possibility for a company toestablish a plant and earn profits in a foreign country especially in which foreign directinvestment opportunities are limited. So, you want to and lack of expertise in a specificarea exists. For example, L&T (Larsen & Toubro) acts as a turnkey, (you know) operatorfor many companies in many countries, especially the countries like the African Nationsright!So, if you have to set up a textile plant, a plastic plant (you know), so L&T helpscompanies to develop where there are raw materials, but they do not have the know-howto set up a plant. So, L and T like companies they do this right! in favour in exchange forsome remuneration.(Refer Slide Time: 10:50)Next is strategic alliance. As the name suggests strategic alliance right! that means, thereis an alliance between two or more firms for some strategic reason right! So, what it issaying? It is a cooperative agreement between two or more companies to work togetherand share resources to achieve a common business objective. So, they share theresources.So, if you see resources are always limited right! So, no firm can have all the resources.The resources could be natural resources, raw material, could be knowledge of the localmarket, anything right! skill, knowledge, so all these things one cannot have. So, when astrategic alliance happens the firms tie hand, they join together and they utilize eachother’s resources for their success.Example ICICI Bank and Vodafone; ICICI Bank is a financial company, Vodafone is atelecom right! India entered into a strategic alliance to launch a unique mobile moneytransfer and payment service called m-pesa right!. So, this is where ICICI bank alsowould gain and Vodafone also would gain ok.(Refer Slide Time: 12:04)What is the advantage? Let us see. So, the advantages of strategic alliance are like, thereis a technology exchange between the firms, global competition you do better in (youknow) in the competition, the industry is converging as you saw one is a telecom, theother is a financial company right! bank or something, and then you reduce the riskthrough economies of scale. These are the advantages.But it must be having some disadvantages also. So, let us see what are they. Clashingcultures, legal entanglements, damage to reputation. So, what is happening? There is alarge chance that the companies that have a strategic alliance, they have too verydifferent cultures right!And because of the differences in culture and habits, the company the employees do notgo well with each other, and there is a clash in the style of the management too. So, thisleads to failure of the strategic alliance right! There also then once that happens there arelegal complications that happens right! And finally, it may lead to a damage in thereputation of the firms which has been (you know) built over a long, long period of timeand good work right!(Refer Slide Time: 13:16)How does it happen? So, there are some steps you can see. So, the first step is developbusiness partner strategy and business plan right! The second is pursue close targetedpartner agreements. So, in the first you have a business plan, and in second you have aagreement. Third, the lead partner and enablement and development. So, now, joininghands and both are trying to work together. In the fourth, lead generation processes. So,they are generating leads now. Five, deliver incremental sales right! and six, theymeasure the outcomes and the optimization.So, what you do is you take your time. Slowly look at this diagram, and look at themovement of the arrows, and try to take an example of some company, and try to look atthe strategic alliance in between these two firms right! So, you will understand it in amuch better way.(Refer Slide Time: 14:12)This is an example I have brought for you which talks about Philips global strategicalliances. So, in there are several products and several industries Philips runs itsproducts, and how it has partnered with the different companies, and the incorporationwhere they have been incorporated it is also mentioned.So, advanced ATS they have participating companies are AT&T, for example, a fewonly I can say, compact disc they have tied up with Sony. For example, mini computersoftware a number of companies are have been tied up right! For semiconductors theyhave tied up with Intel, Siemens, etc. For (you know) video recorders they have tied upwith Grundig, Victor Company.So, and you can see the different various countries where they are incorporated Italy,Japan, Holland, Germany, France, Britain, Hong Kong, so many countries right! So,strategic alliance helps the companies to grow and use each other’s resources morewisely.(Refer Slide Time: 15:11)The next thing that we are talking about is overseas assembly. Now, what is this overseasassembly? Let us understand what is assembling. Today with the increase in networkingand of (you know) technology, it has become very simple or it has become much easierto send your products to (you know) send details about your products to different places.So, finally, what has happened, companies are finding it easier and its more costeffective to send a product in different modules or parts which is called (you know)modular design also sometimes it is called, so and instead of sending it in a completepackage. So, because that takes more space and logistical difficulties arise.So, what it is saying assembling is a compromise between exporting and foreignmanufacturing. The firm produces domestically all or most of the components areingredients and shifts them to the foreign markets to be put together as a finished productas I just said modular design.By shipping the completely knocked down, the firm is saving on transportation cost andalso on custom tariffs which are generally lower on unassembled parts than on thefinished products ok. Another benefit is the use of local employment which facilitates theintegration of the firm in the foreign market. So, these are the advantages when you doan assembly overseas ok.Some examples are in the automobile and farm equipment industries right! In similarfashion, this is an example of Coca-Cola; you will it is very interesting to know Coca-Cola ships its syrup to foreign markets where local bottle plants add the water in thecontainer. You must be knowing Coca-Cola never shares its (you know) the formularight! So, it is still it is saved in Atlanta in a bank.So, what happens they send the syrup to the foreign markets, and the local bottle plantsadd the water and container right! In the food and pharmaceutical industry, theequivalence of assembling is known as mixing which you just saw, where an importedingredients are used at the firms overseas facilities.(Refer Slide Time: 17:19)Now, this is another form of now entry, the foreign direct investment or we say FDIright! FDI, where we see that there is a lot of pressure for the governments also to attractFDI in every country. So, a country’s growth is assumed or measured as one of theindices to measure is FDI right! So, what it is saying, what is FDI basically? It is aninvestment in the form of a controlling ownership in a business in one country by anentity based in another country.So, that means what? Under this definition what is happening there are several ways inwhich companies can invest directly in foreign markets right! For example, constructionof facilities or investment in facilities in a foreign market which is called a Greenfieldinvestment, that means, there is a company from abroad can come here and start anentirely new plant or business, or it can it also the opposite of Greenfield is Brownfieldinvestments.So, what is a Brownfield investment in which an existing infrastructure is there(existing)and the company just tries to buy it or tries to (you know) in put in its capital, and try tomake it much better and improved ok. Another form of which comes through FDI is themerger and acquisition, and the last one is investment in a joint venture located in aforeign market.(Refer Slide Time: 18:40)So, let us see some of them. So, FDI, although FDI will be covered more deeply in onemore in the know in the forthcoming chapters. So, just I am giving you a touch. Foreigndirect investment today every country every (you know) government is pressurized isthere is a pressure for the governments to bring in more foreign direct investment, thatmeans, let us invite more foreigners to come to our place and start their operations, sothat our people get employment and revenue is generated out here.Example is Vodafone, a British firm, acquired the Czech Telecom Oscar Mobil right!;eBay acquired Luxembourg’s Skype Technologies, a prepacked software companywhich is both are very famous, you must be aware of them right!.(Refer Slide Time: 19:23)So, some of the pros and cons. So, what are the advantages of FDI? Now, look at it.Diversifies the investor’s portfolios. They investor, the investing company it; it candiversify its portfolio; it can get into new areas. Promotes stable long term lending right!provides financing to the developing countries.So, as a result they find new markets also ok. Provides technology to the developingcountries. So, it is also not only a kind of a (you know) benevolent behaviour, but also itis economically sound to them. So, in a new country where there is a lot of underdevelopment, so through FDI you can send in your technology, you can pass in yourtechnology for the development of the nation and as a return you can earn your revenuealso.But what are the cons? It is not suitable for strategically important industries, becausethere must be there can be some very difficult things which cannot be passed on, so thatis one difficulty. Investors may have less moral attachment because of the kind ofpollution and kind of things that it generates right! Unethical access to local markets.So, sometimes firms may use that as a strategy to enter into the new markets and try toexploit it. So, this diagrams if you can see it the pictures are very clearly (you know)making you understand what are the advantages and disadvantages right!(Refer Slide Time: 20:51)So, the FDI route is done in two ways. One is the automatic route where no approval orauthority is required by the private foreign investor. He can invest in any company withno need for government approval that is one way.The other is a government route in this route there is no investment without the priorapproval of the government of India. Why it differs? Obviously, this differs because ofthe kind of the industry right! and its impact, its local impact that it can make on the hostcountry right! So, on basis of this, the FDI route is divided two ways.(Refer Slide Time: 21:27)I have brought some examples for you in India. Agriculture and animal husbandry, thereis a 100 percent FDI limit, that means, anybody can put in hundred percent stake, canbuy 100 percent stake, and the entry route is automatic; plantation, 100 percentautomatic. Multi brand retailing, retail trading this is (you know) the entry route isthrough government. Why because, obviously, it can impact lot of retailer’s smallretailer’s it is 51 percent limit.Petroleum and natural gas, 49 percent, it is again automatic. Broadcasting and contentservices, FDI limit is 49 percent and under government. Banking-Public Sector, 20percent right! and under government. Civil aviation, it has been made 100 percent and itis automatic. So, these are some of the examples.You can find many more examples and maybe when you start reading you may make anote of it and make a table or an excel, where you can note down which are the sectorsand what is the amount of limit, and what is the route right! It is better if you can do thatas a homework.(Refer Slide Time: 22:30)Where is FDI prohibited? FDI is strictly prohibited in some areas some of them beingfirst is the gambling and betting sector. So, here FDA is not encouraged right! Lotterybusiness, including government, private lottery, online lotteries, nowhere FDI is invited.Activities or sectors not open to the private sector investment like atomic energy,railways, still yet in railways also there is no FDI right! Retail branding except singlebrand, and it is not expect, it is except, except ok, except single brand product retailingright!Business of chit fund, real estate business, construction of farmhouses, trading andtransferable development right’s, manufacturing of tobacco, cigar, all these kinds of sinproducts what you say. So, agriculture, excluding floriculture, horticulture, apiculture,cultivation of vegetables etc., they fall into this prohibited category right!(Refer Slide Time: 23:31)So, this is a quiz I have brought. You may look at this question and you can think of ananswer. Dash (fill in the blank) percent of FDI is allowed in the insurance sector right!So, what is the possible answer, can you think of it? Ok. So, the correct answer is ‘a’, 49percent FDI is applicable in the insurance sector via the automatic route in India.(Refer Slide Time: 23:56)Now, this is a homework for you. So, kindly find the FDI in the following sectors. Ifmaybe I have already mentioned about retail and mine, but still you can do it for theothers. For example, print media newspaper, FM radio, airport, airlines, airlines also Ihave mentioned I think SEZ - Special Economic Zones, retail, mining, education and theNBFCs - Non Banking Financial Corporations. So, what is the kind of FDI involvement/allowed/ permission that is available to them, just find out and make a note of it right!(Refer Slide Time: 24:32)So, this is the Greenfield investment I was talking about. Building new productionfacilities in a foreign country. It refers to investment in a manufacturing, office, orphysical company-related structure or group of structures in area where no previousfacilities was existing right! Example McDonald Starbucks both started everything fromscratch in India that was a Greenfield investment, it is a FDI part.(Refer Slide Time: 24:54)Brownfield used for purchasing or leasing existing production facilities which it was notmentioned in the diagram. So, I had written over there if you remember. To launch a newproduction activity, example Tata motors acquisition of Jaguar, Tata motors did not needto build a new factory in the UK, but started running the business from the existingfactory of Jaguar right! So, this is an example.(Refer Slide Time: 25:17)And two more are there. Merger acquisitions are transactions, although we will go deepjust for a brief (you know) introduction in which the ownership of companies or theiroperating units are transferred or combined. A merger is a legal consolidation of twoentities into one. So, a very classic example of you see old company A plus old companyB is equal to new company right! two merges then it could be a new company or it couldbe either A or B right!.So, an acquisition occurs when one entity takes ownership of another’s entity stock. Onevery famous merger and acquisition case I can cite is Compaq and HP right! HewlettPackard and Compaq merged had a merger right! very famous merger. Sometimes whenthere is a reverse merger case also which I will explain when a small firm takes over alarger firm or joins hand over a with a larger firm. So, it is called a reverse merger caseright!(Refer Slide Time: 26:13)So, these are some of the examples another example in India is Reliance communicationhas merged with Maxis right! Maxis Communications Berhad. Sony Pictures - SPIN hasacquired Zee Entertainment and its subsidiaries. So, I will close here because of lack oftime. So, we will wind up here. And in the next session we will start from here only,maybe we will start with the again the last part from the FDI we will start and we willcontinue from there.So, I hope you are clear with the modes of entry, what they are, and how they areimportant. I gave/I tried to give you examples. And through these examples also, so youcan connect and relate, so that you do not forget them. And I gave you some tasks, youcan do it in your free time, and that will help you to (you know) have a betterunderstanding.So, thank you so much.