Q1.

Introduction to Modes of Entry into International Business

The mode of entry refers to the method a company uses to begin operations in a foreign market. All
of which are described below,

1. LICENSING

In the global strategy, a firm (Licensor) allows a foreign company (Licensee) to produce its product in
exchange for a fee (royalty). The licensor usually assists the licensee in setting up production, as well
as in distribution and promotion. Licensing enables the firm to earn revenues that may not be
generated in the home market, leveraging the local knowledge and capabilities of the licensee.

• Example: Coca-Cola licenses its beverage formula to various bottling companies globally.
This allows local firms to produce and distribute Coca-Cola products, adapting to regional
tastes while generating income for Coca-Cola without the need for extensive capital
investment in local production facilities.

2. EXPORTING

A firm may export directly or through an export house. An export house serves as an intermediary,
matching importers with exporters and managing customs documentation, tariffs, and compliance
issues. Exporting requires no investment abroad, making it a low-cost and low-risk entry method.
However, exporters often face tariff and non-tariff barriers and must invest in intensive marketing to
build brand awareness in foreign markets. Payments from exports are typically received quickly.

• Example: Apple Inc. exports its products globally through direct channels, including online
stores and retail outlets, allowing for quick market penetration without the need for
extensive local investments.

3. FRANCHISING

Franchising is a contractual agreement in which one party (franchiser) sells the other party
(franchisee) the rights to use its business name and sell its products or services in a specified
territory. This mode allows a firm to enter foreign markets with minimal investment and reduced
risk, as the franchisee bears the operational costs. The franchisor benefits from royalties based on
sales while providing support in branding, training, and operational guidelines.

• Example: McDonald's operates globally through franchising, where local franchisees invest
in and manage restaurants, while McDonald’s provides branding, training, and operational
support, thus minimizing risk for the franchiser.

4. CONTRACT MANUFACTURING

In contract manufacturing, a company allows a foreign firm to produce goods under its brand name
or trademark. This enables firms to enter foreign markets without the need for significant
manufacturing or marketing investments. Companies often use contract manufacturing to quickly
respond to temporary increases in demand, capitalizing on lower labor costs in other countries.

• Example: Nike collaborates with over 700 contract factories worldwide to manufacture its
footwear and apparel, enabling it to focus on design and marketing while leveraging cost-
effective production capabilities without establishing its own factories.
5. JOINT VENTURES AND STRATEGIC ALLIANCES

In an international joint venture, two or more companies from different countries enter into a
partnership to undertake a significant project. This arrangement allows for the sharing of risk,
technology, and expertise, and is particularly useful where foreign companies face regulatory
restrictions.

• Example: PepsiCo partnered with Elite Industries to market Frito-Lay snacks in Israel,
utilizing local knowledge and distribution networks to successfully penetrate the market.

A Strategic Alliance is a long-term agreement between two or more companies aimed at achieving
competitive market advantage. Unlike joint ventures, strategic alliances do not involve sharing costs,
management, risks, or profits, providing flexibility while allowing access to broader markets, capital,
and technical expertise.

• Example: Hewlett-Packard has formed strategic alliances with companies like Hitachi and
Samsung to co-develop technologies and enhance their market presence without the
complexities of forming a joint venture.

6. FOREIGN DIRECT INVESTMENT (FDI)

FDI refers to the investment made by a company in acquiring or establishing business operations in a
foreign country. The most common form of FDI is through foreign subsidiaries, which operate like
domestic firms and manage their own production and distribution functions. These subsidiaries must
comply with the laws of both the home country and the host country, allowing for complete control
over technology and operational expertise. However, FDI requires a substantial investment and
involves higher risk.

• Example: Toyota has established multiple manufacturing plants in the United States,
operating as a domestic entity while benefiting from local production and distribution
efficiencies. This strategy allows Toyota to respond quickly to market demands while
minimizing costs associated with tariffs and transportation.

Q2. EPRG Approaches: A Comprehensive Overview

The EPRG framework, introduced by Howard V. Perlmutter in 1969, serves as a foundational model
for understanding how companies manage their international operations. In 1973, Wind and
Douglas expanded this model to include the Regiocentric approach, creating the full EPRG model:
Ethnocentric, Polycentric, Regiocentric, and Geocentric. Each approach represents a distinct strategy
for engaging in international markets.

1. Ethnocentric Approach

Definition:
The Ethnocentric approach emphasizes the values, ethics, and practices of the home country in
managing international business operations.
Key Features:

1. Focus on Home Country Ethics:

This approach centers on the ethical standards and practices prevalent in the home country,
influencing how the company operates abroad.

2. Production for Home Market:

Companies primarily produce goods and services that cater to the home market, often
neglecting local demands in foreign countries.

3. Headquarters in Home Country:

The company's headquarters is located in the home country, exerting significant control over
international operations.

4. Distribution of Surplus:
Foreign activities are primarily aimed at distributing surplus goods produced for the home
market rather than addressing local market needs.

5. Suitability for Small Enterprises:

This approach is particularly suitable for smaller enterprises that may lack the resources or
knowledge to effectively engage with diverse international markets.

6. Example:
Almarai Company in Saudi Arabia primarily produces dairy products tailored to the tastes
and preferences of Saudi consumers, following practices established in its home market.

2. Polycentric Approach

Definition:
The Polycentric approach focuses on customizing marketing strategies to align with the unique
tastes, preferences, and needs of customers in each international market.

Key Features:

1. Focus on Local Policies and Procedures:

This approach emphasizes adapting policies to local conditions, ensuring relevance in each
market.

2. Emphasis on Marketing Mix:

The marketing mix—product, price, place, and promotion—is tailored to fit local markets,
enhancing customer engagement and satisfaction.

3. Local Needs Met by Local Employees:

Local employees play a crucial role in understanding and meeting the needs of the
customers, providing insights into local culture and preferences.

4. Establishment of Subsidiaries:
Companies often set up subsidiaries in foreign countries to effectively address local market
needs and preferences.
 5. Diverse Strategies Across Countries:
Strategies related to product marketing and development vary from country to country,
reflecting local tastes and requirements.

6. Example:
McDonald's offers a localized menu; while hamburgers are popular in the USA, in Pakistan,
they provide items like Chicken Chapli Burger and Bun Kabab to cater to local culinary
preferences.

3. Regiocentric Approach

Definition:
The Regiocentric approach considers regional characteristics and focuses on adapting strategies to
fit the specific needs of different regions.

Key Features:

1. Catering to Distinct Regions:

This approach acknowledges that each region has unique cultural, political, and economic
characteristics that influence business operations.

2. Establishment of National and Regional Headquarters:

Companies may establish national and regional headquarters to manage operations
effectively across different regions.

3. Strategies Based on Regional Context:

Companies formulate strategies considering the political, social, and economic backgrounds
of the regions they operate in.

4. Common in Certain Industries:

The Regiocentric approach is frequently adopted by industries such as cosmetics and
garments, where regional tastes significantly influence product development.

5. Example:
General Motors employs different strategies for its operations in Europe, America, and Asia,
adapting to the specific regulatory and consumer environments of each region.

6. Exporting to Neighboring Countries:

A company operating successfully in a foreign country may consider exporting to
neighboring countries, taking into account regional laws, culture, and policies in strategy
formulation.

4. Geocentric Approach

Definition:
The Geocentric approach adopts a global perspective, treating the entire world as a single market
and focusing on global strategies.
Key Features:

1. Global Application of Strategies:

This approach applies strategies across the globe, acknowledging that the world is
interconnected and markets are interdependent.

2. Understanding Globalization:
The Geocentric approach reflects the principles of globalization, where companies recognize
and respond to the global market dynamics.

3. Focus on Large Scale Enterprises:

Typically utilized by multinational corporations with significant resources and the ability to
operate in multiple countries effectively.

4. Consideration of Customers Worldwide:

Companies adopting this approach consider the preferences and needs of customers from
every nation, leading to more inclusive strategies.

5. Example:
Microsoft tailors its products and services to meet diverse customer needs worldwide,
ensuring relevance and satisfaction in various international markets.

6. Standardized Marketing Mix:

Under the Geocentric approach, companies analyze tastes and preferences across markets
and often adopt a standardized marketing mix, as seen with Coca-Cola, which maintains
consistent content and branding globally.

Q3. Mercantilism Theory: An Easy-to-Understand Overview

Mercantilism is the first theory of international trade, emerging between the 16th and 18th
centuries. It is an economic idea that suggests a country can become wealthy and powerful by
controlling trade and using government regulations. Here’s a detailed look at the key points,
explained in simpler terms.

Core Principles of Mercantilism

1. Government Control:
Mercantilism believes the government should actively manage the economy to help the
country grow richer.

2. Wealth is Measured in Precious Metals:

At this time, wealth was mainly seen as having gold and silver. These metals were the
currency used for trade between countries.

3. Favorable Trade Balance:

A key goal is to export (sell) more than you import (buy). This way, a country brings in more
gold and silver than it spends, increasing its wealth.

4. Economic Policies:
Mercantilists advocated for strict government policies to achieve these goals, including
tariffs (taxes on imports) to discourage buying foreign goods.
 5. Success Formula:
The simple formula for success was:
More land + More trade + More gold = More wealth and power.

Basic Concepts of Trade

1. Wealth from Metals:

The theory assumes that a nation’s wealth comes from having gold and silver. The more a
country can export, the more gold and silver it can earn.

2. Exporting Goods:
By selling goods to other countries, nations could earn gold. Importing, on the other hand,
meant sending gold out, which was discouraged.

3. Minimizing Imports:
The aim was to keep imports low so that more resources could be sent abroad, leading to
more gold coming in.

4. Thomas Mun's View:

An important writer on mercantilism, Thomas Mun, suggested that to increase national
wealth, countries should always sell more to others than they buy from them.

Features of a Mercantilist Economy

1. High Tariffs:
Countries often imposed high taxes on imports to protect their local industries.

2. Export Subsidies:
Governments provided financial support to businesses that exported goods to encourage
more sales abroad.

3. National Pride:
Mercantilist policies were focused on promoting national interests and pride.

4. Gold and Silver Accumulation:

Countries aimed to collect gold and silver while restricting private ownership or export of
these precious metals.

5. Trade with Colonies:

Mercantilism supported exclusive trade relationships with colonies, where the colonies
would provide raw materials and the mother country would sell back finished goods.

Mercantilist Policies

Common policies included:

• High tariffs on imports to protect domestic products.

• Exclusive trade with colonies, ensuring they traded only with the mother country.
 • Restrictions on foreign ships carrying trade goods.

• Subsidies for exports to help local businesses compete internationally.

• Bans on exporting gold and silver to keep currency in the country.

• Encouragement of local manufacturing through support and subsidies.

Key Assumptions of Mercantilism

1. Limited Wealth:
There is a finite (limited) amount of wealth in the world. One country’s gain is another’s loss.

2. Competing for Wealth:

Countries can only grow rich at the expense of others, meaning they should strive to have
more exports than imports.

3. Favorable Trade Balance:

The goal is always to export more than to import, creating a positive trade balance.

Using Colonies for Trade Balance

1. Colonies Support the Mother Country:

The economy of a colony was always secondary to that of the mother country, focusing on
serving its needs.

2. Raw Materials and Market for Goods:

Colonies provided cheap raw materials and were markets for finished goods produced by
the mother country.

3. Protection and Governance:

In exchange for resources, the mother country provided military protection and political
governance to the colonies.

4. Exclusive Trading Rights:

Colonies were expected to trade primarily with their mother country, restricting trade with
other nations.

Philipp Wilhelm von Hornick's Ideas

Austrian scholar Philipp Wilhelm von Hornick outlined nine key points for a successful national
economy, summarizing mercantilist principles:

1. Utilize All Land:

Make full use of every piece of land for agriculture, mining, or manufacturing.

2. Use Raw Materials Domestically:

All raw materials should be turned into finished goods within the country since they are
worth more.
 3. Encourage a Large Workforce:
A bigger working population supports more production and growth.

4. Keep Gold and Silver at Home:

Do not let gold and silver leave the country; keep money circulating domestically.

5. Limit Foreign Goods:

Discourage imports of foreign products as much as possible.

6. Source Imports Wisely:

If imports are necessary, get them directly in exchange for local goods rather than gold.

7. Focus on Raw Material Imports:

Import mainly raw materials that can be made into finished goods at home.

8. Sell Surplus for Gold:

Always look for opportunities to sell excess goods to earn more gold.

9. No Imports if Local Goods are Available:

If local products can meet needs, do not allow imports of similar goods.

Q4. International Product Life Cycle (IPLC)

Meaning

The International Product Life Cycle (IPLC) is a theoretical framework that describes the stages a
product goes through as it is developed, launched, and eventually phases out in international
markets. This model merges concepts from economics—such as market development and
economies of scale—with product life cycle marketing and standard business strategies. The IPLC
outlines how a product evolves from its inception to its decline, emphasizing the role of innovation,
production, and market expansion across different countries.

IPLC in Developed Nations

1. Innovation Stage

• Description:

o In developed nations like the USA, the innovation stage is characterized by a strong
focus on research and development (R&D). This is the phase where a new product is
conceived and introduced to the market, primarily in its home country.

• Key Features:

o Market Characteristics: During this stage, the product is available exclusively in the
domestic market, leading to low market penetration, minimal competition, and low
sales volumes.

o Investment in Marketing: Significant resources are allocated for advertising and

promotion to create awareness and generate interest among consumers.

o High Costs: Due to low initial sales, the product often has a low profit margin at this
stage, necessitating high promotional spending.
 • Example:

o The electric bulb is a prime example. Invented by Thomas Edison in November 1879
after extensive experimentation (over 3,000 tests), the bulb received patent rights
on January 4, 1879. This innovation marked the beginning of the electric light
industry in the USA.

2. Production Stage

• Description:

o Once the product has been successfully innovated, the production stage focuses on
ramping up manufacturing to meet growing demand. Companies aim to reach
economies of scale to lower costs.

• Key Features:

o Increased Production: This stage sees the transition from R&D to mass production,
meeting the local market's demands.

o Focus on Efficiency: Companies strive to optimize production processes, improve

efficiency, and reduce costs while maintaining product quality.

• Example:

o After the invention of the electric bulb, the Edison Electric Illuminating Company
began large-scale production in 1880. With high demand for electric lighting in
urban areas, the company quickly ramped up its manufacturing capabilities.

3. Export Stage

• Description:

o After saturating the domestic market and achieving economies of scale, the next
step is to export the product to international markets where it has not yet been
introduced.

• Key Features:

o International Expansion: Companies begin to explore foreign markets, leveraging

their established production capabilities.

o Market Penetration: The goal is to capture new customers and increase overall sales
volume through exports.

• Example:

o Following its success in the U.S. market, the Edison Electric Illuminating Company
exported electric bulbs to various countries where electric lighting was still a
novelty, expanding its market presence.

4. Import Stage

• Description:
 o As companies look to globalize further, they may start relocating some of their
manufacturing operations to developing countries to capitalize on lower production
costs and access to new markets.

• Key Features:

o Global Production Strategy: Companies adopt strategies that include transferring

production facilities abroad to take advantage of lower labor costs and fewer
regulations.

o Cost Efficiency: This move can significantly reduce manufacturing expenses and
enhance competitiveness in global markets.

• Example:

o After establishing a strong presence in the global market, the Edison Electric
Company merged with the Thomas Houston Electric Company to form General
Electric. By 1908, they began producing bulbs in developing countries like China,
benefiting from lower production costs.

IPLC in Developing Nations

1. Import Stage

• Description:

o The IPLC in developing countries typically begins with the import of advanced
products from developed nations, reflecting their limited capacity to innovate
independently.

• Key Features:

o Dependence on Foreign Technology: Developing countries often rely on imports for

advanced products, particularly in technology-intensive sectors.

o Limited Domestic Production: Initially, these countries may lack the resources and
infrastructure to produce these goods domestically.

• Example:

o The USA, as a leading exporter of military technology, began exporting drones

(Unmanned Aerial Vehicles, UAVs) to India in 2005, reflecting India's initial
incapacity to manufacture such advanced technology.

2. Consumption Stage

• Description:

o Following the introduction of imported products, consumption levels rise

significantly in developing countries due to high demand and limited availability of
alternatives.

• Key Features:
 o Rapid Adoption: The introduction of imported products often leads to a surge in
consumption, driven by consumer demand and interest in advanced technologies.

o Market Growth: This stage marks a significant increase in market share for imported
products as they become more widely recognized and utilized.

• Example:

o The consumption of armed drones in India increased significantly after their

importation, capturing a market share of approximately 5% to 11% by 2010.

3. Production Stage

• Description:

o As consumption rises, local manufacturers in developing countries begin to replicate

the technologies of imported products and establish their own production
capabilities.

• Key Features:

o Local Production Initiatives: Manufacturers start to reverse-engineer imported

products, adapting designs and technologies to local conditions.

o Investment in Manufacturing: Increased demand for drones leads to investments in

local production facilities, often supported by government initiatives.

• Example:

o With the growing demand for armed drones, Indian defense companies and local
manufacturers started replicating the designs and technologies of the imported
drones, initiating local production and creating domestic capabilities.

4. Export Stage

• Description:

o Once developing countries have developed their production capabilities, they start
exporting their locally manufactured goods to other nations, often at lower prices
due to reduced manufacturing costs.

• Key Features:

o Emergence as Exporters: Developing countries begin to compete in the global

market, leveraging their ability to produce goods at lower costs.

o Focus on Affordability: Products exported are often cheaper than those from
developed nations, appealing to markets in other developing countries.

• Example:

o The Defense Research and Development Organization (DRDO) in India replicated the
technology used in U.S. drones, producing cheaper alternatives. These domestically
manufactured drones were then exported to poorer countries such as Bangladesh,
Sri Lanka, and Indonesia, providing them with affordable options.
Q5. Multinational Enterprise (MNE)
Definition

A Multinational Enterprise (MNE) is a corporation that operates in multiple countries beyond its
home country. MNEs manage production or provide services across various nations and typically
have a centralized headquarters that oversees their global operations. This structure allows them to
coordinate activities, strategies, and resources internationally.

Characteristics of Multinational Enterprises

1. Global Presence

o MNEs operate in numerous countries and maintain subsidiaries, branches, or

affiliates worldwide. This extensive footprint enables them to reach diverse markets
and customers.

2. Large Scale Operations

o They often possess substantial resources and engage in large-scale operations,

which facilitate the production and marketing of goods and services on a global
scale.

3. Centralized Control

o Despite their widespread operations, MNEs usually have a central headquarters in

their home country that exercises control over international activities, ensuring
consistent strategic direction and management.

4. Diversified Products and Services

o MNEs offer a broad array of products and services tailored to meet the specific
needs and preferences of various markets, allowing them to cater to diverse
consumer demands.

5. Advanced Technology and Innovation

o Many MNEs leverage cutting-edge technology and innovative practices to maintain

competitive advantages across multiple markets, enhancing efficiency and product
quality.

6. Strategic Alliances and Joint Ventures

o They frequently collaborate with local firms through partnerships or joint ventures
to penetrate new markets, share risks, and enhance market knowledge.

7. Complex Organizational Structure

o Given their global operations, MNEs often have intricate organizational structures
designed to manage diverse functions across different regions and countries.

8. Influence on Local Economies

o MNEs play a significant role in local economies by contributing to investment,

creating jobs, and boosting GDP in host countries, often becoming key players in the
economic landscape.
Advantages of Multinational Enterprises

1. Market Expansion

o MNEs can enter new markets, increasing their customer base and revenue streams.
This expansion allows them to capitalize on growth opportunities in various regions.

2. Economies of Scale

o By operating globally, MNEs can achieve cost savings through bulk production and
distribution, reducing per-unit costs and enhancing profitability.

3. Access to Resources

o MNEs gain access to a diverse array of natural and human resources, allowing them
to lessen reliance on their home country's resources and optimize supply chains.

4. Diversification of Risk

o Operating in multiple countries enables MNEs to spread and mitigate risks

associated with economic fluctuations or downturns in any single market.

5. Enhanced Brand Recognition

o A global presence boosts brand visibility and reputation, giving MNEs a competitive
edge over local players by leveraging their international stature.

6. Transfer of Knowledge and Technology

o MNEs can share knowledge, skills, and technology among their international
subsidiaries, promoting innovation and efficiency across their operations.

7. Competitive Advantage

o By leveraging global operations, MNEs can outperform local competitors by offering

superior products, services, or pricing strategies tailored to each market.

8. Political and Economic Leverage

o Due to their size and economic influence, MNEs can exert significant power in host
countries, often negotiating favorable treatment or incentives from local
governments.