Page 100 - DMGT545_INTERNATIONAL_BUSINESS

Unit 6: Modes of Entering International Business

2. Exporting may help a firm achieve experience curve and location economies. By notes
manufacturing the product in a centralized location and exporting to other national
markets, the firm may realize substantial economies from its global sales volume. This is
how Sony came to dominate the global TV market.
Disadvantages of exporting

The following are the disadvantages of exporting:
1. Exporting from the firm’s home base may not be appropriate if there are lower-cost locations
for manufacturing the product abroad (i.e. if the firm can realize location economies by
moving production elsewhere.)
2. High transport costs can make exporting uneconomical, particularly for bulk products.
One way of going around is to manufacture bulk products regionally.
3. Tariff barriers can make exporting uneconomical. Similarly the threat of tariff barriers by
the host-country government can make it very risky.
4. Exporting through local agent may not be good proposition since foreign agents often carry
the products of competing firms and so have divided loyalties.

Example:

1. Direct Exporting: Baskin Robbins initially exported its ice-cream to Russia in 1990 and later
opened 74 outlets with Russian partners. Finally in 1995 it established its ice cream plant in
Moscow.
2. Selling of products by Hindustan Lever in India to Unilever in USA- This transaction is
treated as exports in India and imports in USA.

6.2.2 licensing

Licensing makes sense when a firm with valuable technical know-how or a unique patented
product has neither the internal organizational capability nor the resources to enter the foreign
markets. Licensing essentially permits a company in the target country to use the property of
the licensor. Such property usually is intangible, such as trademarks, patents, and production
techniques. The licensee pays a fee in exchange for the rights to use the intangible property and
possibly for technical assistance.
Because little investment on the part of the licensor is required, licensing has the potential to
provide very large ROI. However, because the licensee produces and markets the product,
potential returns form manufacturing and marketing activities may be lost.

advantages of licensing

The advantages of licensing are as follows:

1. Licensing has the advantage of avoiding the risks of committing resources to country
markets that are unfamiliar, present considerable economic uncertainty or are politically
volatile. By licensing the technology or the production rights to foreign-based firms, the
firm does not have to bear the costs and risks of entering foreign markets on its own, yet it
is able to generate income from royalties.

2. Licensing is often used when a firm wishes to participate in a foreign market but is
prohibited from doing so by barriers to investment.
3. Licensing is frequently used when a firm possesses some intangible property that might
have business applications, but it does not want to develop those applications itself.

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