International Bus 540: International Business Entry Modes

International Business Entry Modes
Robbie Watson
University of Lafayette
International Business
IBUS 540
Miguel A. Orta
June 20, 2018

Abstract
The rise in globalization over the last few decades has helped facilitate and encourage corporations to expand into international markets. This paper will review the five common international expansion entry modes, and the pros and cons of each method. Finally, my employer is in the technology industry and I will breakdown and recommend which entry mode would work best for international expansion.

International Business Entry Modes
Globalization has broken down many of the trade barriers and has allowed companies to expand internationally over last few decades. Emerging markets such as Brazil,

Russia, India, Indonesia, China, and South Korea offer corporations future growth potential (Knight, 2015). Another reason to expand internationally is to minimize the financial risk by only conducting business in one country. For example, if a corporation is only in the United States and the economy declines, the company may face tremendous losses due to not being diversified in other countries. However, if the company has operations in other countries, the financial losses could have been minimized by allowing profits in other strong economic countries.
In order to survive, companies must continuously increase revenues and grow the business while maximizing shareholder wealth. The decision to expand internationally is not an easy undertaking. Going global can be a risky and costly venture, but the rewards can pay off immeasurably for many years to come.

Five Common International-expansion Entry Modes
Exporting
Exporting is usually the simplest and most common way businesses begin expanding internationally. Exporting is a function of international trade where goods produced in one country and shipped to another country to be sold. Exporting with nations that have few restrictions on trade make it a viable option for companies to increase revenues by exporting goods and services to other countries.
Pros
Exporting provides a fast way to tap into foreign markets with minimal risks. If the company’s country of origin experiences a decline in products, exporting may be a viable solution to increase revenues and grow consumer demand elsewhere. Exporting provides a way to test the market and see if there is a demand for the product or service (Orta, 2018).
Cons
Exporting usually involves an importer which buys and sells the products for you. In essence the importer becomes a “middle man” which adds an extra layer of complexity and creates a loss of control for the company. Exporting can add additional costs such as transportation costs, bulk discounts paid to importers, and difficulties responding to customers’ needs in a timely manner (Zekiri, 2016).

Licensing and Franchising
Licensing is when a company leases the right to use its intellectual property, patents, copyrights, etc.

for use in a foreign country for a fee. An example of licensing is with the NFL, by allowing
its brand to be licensed to memorabilia, television broadcasts, sporting goods, toys and video games.
Franchising is where one party (the franchiser) grants another party (the franchisee) the right to use its trademark or trade-name as well as certain business processes to produce and market and market goods and services. Common examples of franchising are with fast food chains such as McDonalds, and Burger King.
Pros
Franchising provides fast entry into a country with low cost and low risk. The setting up of the operational facilities is the responsibility of the franchisee. Since the licensee and franchisee are in the foreign country, it is easier for it to respond to customer demands.
Cons
It is difficult to control the operation of the licensee or franchise. In recent news Burger King in Russia was running an advertisement that was found offensive to some cultures (Scott, 2018). Negative publicity is hard to control and manage with franchises. Finally, the firm may end up creating a competitor by agreeing to licensing and franchising deals in new foreign

markets.

Partnering and Strategic Alliance
Partnering maybe necessary when entering some foreign markets. Several countries require you to have a foreign partner or share portion of the company with them to be eligible to conduct business. Partnering can be very useful in markets where culture and social norms are very different than your own (Orta, 2018). A strategic alliance also known as a joint venture is when two or more firms join together to create a new business entity. The companies agree to work together in a region to sell a product or service.
Pros
If the company does not mind sharing revues with a partner, joint ventures might be a feasible way to enter a foreign market. China requires foreign businesses to partner with a Chinese company in order to operate. If the partnership or strategic alliance goes well, both companies will share in the profits. If the venture fails, each company will only be responsible for their half of the loss.
Cons
Integration problems may arise between the two companies. Since a partnership is between two companies, conflicts may arise on what is the best business decisions the company should pursue. Finally, partnerships and joint ventures tend to be costlier than exporting and franchising/licensing.

Acquisition
Acquisitions are when one company purchases most or all of another companies shares in order to take control of the company. By buying another company in a foreign region, it gives you ownerships of a business that is already established and well known in the foreign market from day one.
Pros
Fast entry into the marketplace with an established operation from day one. Acquisitions also allow the removal of a rival companies by buying them out. When acquiring another company, you obtain all the former companies intellectual property and any copyrights and any exclusive rights they may own.

Cons
High costs in acquiring companies, and the potential integration issues between the two company’s cultures. Acquisitions sometimes fail to bring in the income potential executives hoped to bring in (Ciesielski, 2016). Finally, acquisitions are hard on employees who are sometimes forced to take pay cuts, relocate, or worse get laid off due to acquisitions.

Greenfield Venture
Greenfield venture can be defined when a parent company starts a new business venture in a foreign country by constructing new facilities and creating new jobs from the ground up.
Pros
Since the company will employ locals, this can be viewed as helping building the local economy by hiring local talent. Greenfield ventures also provide maximum control over day to day operations and mitigates several negatives of acquisitions such as overpaying and integration issues.
Cons
Greenfield ventures are considered costly and inherit high levels of risks. Also, the time it takes to build facilities, hire and train staff can create a long lead time before the company is operational and making profits.

Conclusion
My current employer is DXC Technologies which is a spinoff of Hewlett Packard. Our company delivers network communication solutions to clients around the world. The international expansion model I would recommend would be the use of acquisitions. The technology industry contains hundreds of small startup companies that are creating revolutionary technologies. By acquiring technology startups, larger corporations can introduce many new technology offerings to their customers. For example, HP was lacking in the wireless sector of its business, and instead of engineering its own products it decided to buy the leading wireless vendor Aruba. Once the acquisition was complete, HP was able to enter the wireless sector and almost immediately see profits in the wireless sector.
My employer also does a lot of government contracts, and if a competitor has won a lucrative long-term contract, acquisitions may be a feasible option to obtain these long-term contracts from its competitors.

Regardless of which entry method is chosen, the inherit risk of international expansion must always be considered into long term corporate goal and strategies.

References
Ciesielski, J. T. (2016). How Autonomy Fooled Hewlett-Packard. Retrieved from http://fortune.com/2016/12/14/hewlett-packard-autonomy/
Knight, G. (2015, February 02). Born Global Firms: Evolution of a Contemporary Phenomenon. Entrepreneurship in International Marketing, 3-19. https://doi.org/10.1108/S1474-797920140000025001
Orta, M. (2018, June). Module 2 Overview on VoiceThread Lecture Notes [Video file]. Retrieved from https://moodle.louisiana.edu/pluginfile.php/1636549/mod_resource/content/1/061318%20MODULE%203-DEVELOPING%20A%20BUSINESS%20PLAN.pdf
Scott, C. (2018). Burger King Russia apologies for World Cup ’impregnation’ ad. Retrieved from https://www.cnn.com/2018/06/20/football/burger-king-russia-apologize-for-world-cup-impregnation-advert-spt-intl/index.html
Zekiri, J. (2016). Motivating Factors and the Modes of Entry in Other Markets. Ecoforum, 5. Retrieved from

http://www.ecoforumjournal.ro/index.php/eco/article/view/442