TOPIC 2

MODES OF INTERNATIONAL BUSINESS

Import/Export
Investments
Licensing and Franchising
Turnkey Operations
Management Contracts

Import- It means to buy goods and services from other countries for the
purpose of sale in own countries.
Export- It means selling goods and services to other countries for the
purpose of trading in those countries.
Importing and exporting services includes transportation, college degrees,
etc.
Investments- It means to purchase any asset which will give something in
return in future and which can be measured in monetary value. Investments
are of two types:
Foreign direct investments: Foreign direct investment (FDI) is
an investment made by a company or individual in one country in
business interests in another country, in the form of either
establishing business operations or acquiring business assets in the
other country, such as ownership or controlling interest in
a foreign company.
Portfolio Investments: A portfolio investment is a hands-off or
passive investment of securities in a portfolio, and it is made with the
expectation of earning a return. This expected return is directly
correlated with the investment's expected risk.
Franchising- Its an agreement between two companies of different country,
where one company gives the permission to use only their intangible
 property. But they cannot have the ownership. This agreement must be
renewed after every 3-5 years. For eg- Pizza hut has given this permission
to Transcom beverage of Bangladesh. Transcom Beverage is now running
Pizza Hut as a franchisee.
Licensing- Its an agreement between two companies of different country,
where one company gives the permission to use their intangible property and
the licensee can have the power to control the company. This agreement
must be renewed after every 3-5 years.
Turnkey Operation- Its an agreement between two parties where one party
undertake the full responsibility of any specific project from beginning to
completion, and then handover the completed project to the main party. For
eg- construction of Padma and Jamuna Bridge.
Management contract-
Joint Venture: Its a business arrangement in which two or more
organizations agree to use their resources for accomplishing a
specific task. This task can be a new project or any other business
activity. For eg- Maruti-Suzuki.
Merger: Its a combination of two or more companies to form a new
company. It can be done in many forms, such as:
i) Horizontal Merger: when two or more company merges within
the same industry. It is discouraged by the government because
of monopoly. Customers are the loser here because they have to
pay more prices. For eg- Robi Axiata+Airtel Bd= Robi
ii) Vertical Merger: it occurs between two companies in the same
industry value chain. It might be backward or forward
integration.
iii) Conglomerate Merger: It occurs between companies in
completely different and unrelated business. For eg- Shoe
Business and Biscuit Business.
iv) Concentric Merger: When they are somehow related and merge
between them is known as concentric merger.
Acquisition: It is the purchase of one company by another company
but no new company will be formed. For eg- Microsoft acquired Nokia.
 Strategic Alliance: Its an agreement between two or more parties to
complete a set of objectives. Its a bonding between two companies,
and they have close relationship to each other. For eg- HP and Disney.

Motive for Collaborative Arrangements: General

The reasons for the companies to collaborate with other companies in either
domestic or foreign operations are:

Spread and reduced cost- To produce or sell abroad, a company must incur
certain fixed costs. A company may have excess production or sales capacity
that it can use to produce or sell for another company. The company handling
the production or sales may lower its average costs by covering its fixed
costs more fully. Likewise, the company contracting out its production or
sales will not have to incur fixed costs that may have to be charged to a
small amount of production or sales.
Specialize in competencies A company may seek to improve its
performance by concentrating on those activities that best fit its
competencies, depending on other firms to supply it with products, services,
or support activities for which it has lesser competency. Large, diversified
companies are constantly realigning their product lines to focus on their
major strengths. This realigning may leave them with products, assets, or
technologies that they do not wish to exploit themselves, but that may be
profitably transferred to other companies.
Avoid competition Companies may band together so as not to compete.
Companies also may combine certain resources to combat larger and more
powerful competitors.
Secure vertical and horizontal links There are potential cost savings and
supply assurances from vertical integration. Horizontal links may provide
finished products or components. For finished products, there may be
economies of scope in distribution, such as by having a full line of products
to sell, thereby increasing the sales per fixed cost of a visit to potential
customers.
Gain knowledge Many companies pursue collaborative arrangements to
learn about a partner's technology, operating methods, or home market so
 that their own competencies will broaden or deepen, making them more
competitive in the future.

Motive for Collaborative Arrangements: International

Gain location-specific assets Cultural, political, competitive, and economic

differences among countries create barriers for companies that want to
operate abroad. When they feel ill-equipped to handle these differences,
they may seek collaboration with local companys who will help local
operations. In other countries, foreign companies may team with local
companies to gain operational assets.
Overcome legal constraintsCollaboration can be a means of protecting an
asset. Many countries provide little protection for foreign property rights
such as trademarks, patents, and copyrights unless authorities are prodded
consistently. To prevent pirating of these proprietary assets, companies
have sometimes made collaborative agreements with local companies, which
then monitor that no one else uses the asset locally.
Diversify geographically- By operating in a variety of countries a company
can smooth its sales and earnings because business cycles occur at different
times within different countries.
Minimize exposure in risky environments- Companies may be affected by
any political or economic situation and to overcome the situation the company
should place its operation in different countries. Because there is a very low
chance to be affected by these situations at the same time.
Depth of Involvement in Foreign Market

FDI

Local Packaging

Sales through Own Representatives

Sales via Distributors

License