Page 97 - DMGT545_INTERNATIONAL_BUSINESS

International Business

notes objectives

After studying this unit, you should be able to:

l z Explain how firms choose which foreign markets to enter and at the factors that are
important in determining the best timing and scale of entry

l z Discuss the choice of entry mode
l z Describe the role of strategic alliances
introduction

The choice for entering foreign market is another major issue with which international business
must wrestle. The various modes for serving foreign markets are exporting, licensing or
franchising to host country firms, establishing joint ventures with a host country firms, setting up
a new wholly owned subsidiary in host country to serve its market, or acquiring an established
enterprise in the host nation to serve the market. The optimal entry mode varies by situation
depending on factors like transport costs, trade barriers, political risks, economic risks, and firm
strategy.
6.1 modes of foreign expansion

In this unit, we discuss three basic decisions that a firm contemplate while making foreign
expansion
(a) Which markets to enter?

(b) When to enter those markets, and
(c) On what scale.

Which foreign markets?

There are number of nation-states in the world and all of then do not hold the same profit potential
for a firm entering foreign market. The choice must be based on an assessment of a nation’s long
run profit potential. This potential is a function of several factors such as:
1. Detail of the economic and political factors that effect the potential attractiveness of a
foreign market.

2. Balancing of benefits, costs, and risks associated with doing business in that country.
With regard to political factors the cost of doing business in a country can be increased by
a need to pay off the politically powerful to be allowed by the Government to do business.
With regard to economic factors, one of the most important variables is the sophistication
of a country’s economy. It may be more costly to do business in relatively primitive or
undeveloped economies because of the lack of infrastructure and supporting businesses.
At the extreme, an international firm may have to provide its own infrastructure and
supporting business, which raises costs.
As for legal factors, it can be more costly to do business in a country where local laws and
regulations set strict standards with regard to product safety, safety in the work place,
environmental pollution, and the like. It can be more costly to do business in a country
that lacks well-established laws for regulating business practice. Similarly, local laws that
fail to adequately protect intellectual property can lead to the “theft” of an international
business’s intellectual property and lost income.

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