Theories Of Companys Internationalization

Published Date: 02 Nov 2017

Chapter I

Theories of company’s internationalization

Internationalization as a sequential process more deeply involved in the company's international operations, with the inevitable entering into international markets has always been fraught with many barriers: the objective (administrative, tariff and non-tariff trade barriers) and subjective.

Internationalization theory considering motives overcoming international barriers and, in fact, answer the questions: why and in what form internationalization occurs? Traditional theories of internationalization became widespread in the late XX century, mainly considering the activities of transnational corporations (TNCs) or individual countries in the international economic relationships. At the same time, against the apparent hopelessness of the resource model of development, more and more countries are attracted to the innovation economy with is widely using in the all sectors of world economy including banking sector.

Lover given description and summarizing of several main internationalization concepts of development with discussed in chronological order, and also defined main theoretical elements in the innovation economy, and weaknesses of theories in terms of the banking sector.

Product life cycle theory (R. Vernon, 1966)

Product cycle hypothesis in a new international environment with build on the assumption that the international distribution of resources introduced a temporal dimension: the product life cycle from innovation to standardization. Life cycle analysis has led to the understanding of differences in the structure of capital resources and innovative capabilities between developed and developing countries. At the initial stage of effective allocate production in the developed countries, with is father will gradual shift in the direction of developing countries (middle life cycle).

According to the hypothesis of the product cycle, companies allocate production abroad relying on imaginary or real monopolistic advantages. Innovative leadership is one of the existing types of advantages. The advanced and innovative companies can be created directly in the developed industrial market of a foreign country, because there are all conditions for development, like: logistics, scientists, and engineers.

In the banking sector, in terms of the analysis from the product like cycle theory advisable to increase the sales of products those are still in the initial stage of its development. The development products sale that have already reached their peak or the demand for which is on the market has entered a phase of stagnation, usually requires such costs and expenses with which it is impossible to achieve a high level of competitiveness. However, individual services, especially in those in which great emphasis is built on traditional banking efficiency technologies can support the prevailing scale of sales.(Vernon, 1988)

The theory of competitive advantage, (M. Porter 1990-2006)

On the choice of a competitive strategy of the firm, influence: the structure of the industry and the place occupied by the company in this industry. This theory formulates five forces affecting competition in the industry (Porter's five forces). On the position of the firm in the industry affect its competitive advantage. It allocates four determinants that shape the system competitive environment of the country: factor conditions, demand conditions, related and supporting industries, strategy, structure and competition of the company. It imposes the additional factors like the role of government and the contingency.

Innovation - one of the key ways to achieve competitive advantage. Through innovation creates a new way of competition, with which the company entered the market. Occurrence is an event that has little to do with the conditions of development in the country and firms and national governments often do not have any influence on it. This includes the inventions, the major technological advances (biotechnology, microelectronics, etc.). Random events have an impact on the competitive position of the start-up companies in the industry. They reduce or completely eliminate the gap between the competitive advantages of the old players and start-up companies.

General weaknesses of the theory: the focus is on the determinants that affect the competitive advantage, do not pay attention to the measurement of competitive advantage. The main problems of the banking competition are the differentiation of banks and unjustified from an economic point of view, the number of standard in the market of banking services. At the same time, to improve the competitiveness of each individual bank group needed some specified amount of actions. (Porter, 2005)

Uppsala model

The model considers internationalization as a process of accumulation of empirical knowledge. The basic object of study is the stages of development of the company and its behavior at different stages of development. The theory postulates the existence of a positive relationship between the stage of penetration of foreign markets and the degree of awareness of the foreign market.

The model does not take into account the innovative component, because internationalization realized as a process of accumulation of empirical knowledge is carried out evolutionary. However, we can assume that in the process of passing the stages of internationalization company accumulate experience in innovation and administration, including in the field of innovation management, marketing, etc., and not only in the development of new technologies.

The model considers internationalization as extended in time sequential process, guided by the accumulated empirical knowledge. This approach is intuitive and successful in explaining the internationalization of medium and large industrial companies. The main weaknesses of Uppsala model is that it is too deterministic and it does not take into the consideration interdependences between various country markets. (Mathews, John A. Matthews, John, 2002)

Dunning’s Eclectic paradigm

Theory eclectically combines resource theory, the theory of accommodation, and the theory of internalization. It forms the OLI-paradigm, which includes all elements or benefits of management process (ownership-occupancy-internalization). It proves that internationalization through FDI based on the OLI advantages is preferable to other methods of internationalization.

Innovative component is the presence of specific assets, including non-material, the possession of which gives advantages over firms-resident foreign markets. There are a lot of best available combinations of invested assets abroad. Added the time factor, and examines the impact of FDI on the various stages of the life cycle.

The theory focuses on the examination of the thesis that the benefits of internationalization is in the assumption that the direct foreign investment preferable to other strategies for entering foreign markets. The OLI theory does not explain all the effect and motives of foreign banking markets, the timing of FDI into banking sector, and does not interpret the market liberalization effects and structural changes in the emerging markets. (Dunning, 1991)

The choice of international market

With the transition to a market economy and the liberalization of foreign trade activities for various enterprises and organizations all over the world appear a great opportunity to enter the new international market. The company that is planning to enter the international market is generally focusing all their marketing efforts on choosing a specific market. The choice of international market involves the examination of three parameters:

1) The potential and conditions of this market;

2) The intensities of using competition methods;

3) Goals and capabilities of the enterprise.

The market potential is, primarily, determined by its capacity (development prospects, the penetration availability of the foreign company without excessive cost and time, etc.). The main obstacles of enterprise that plans to enter the international market are tariff barriers, non-tariff restrictions, and legal obstacles.

The second parameter that should be taken in the consideration during selection of foreign markets is the estimation of the intensity and the practical methods of the competition. Competition should be studied in the following areas:

The third parameter what must to be taking in to the account during process of choosing foreign markets is determining the goals and capabilities of the enterprise. Thus, company should undertake a thorough analysis of the actual situation of the company on the international market, identify the strengths and weaknesses of its activities, and determines the allowances that can be used successfully in both domestic and foreign markets.

Complex research of foreign markets is generally built on the analyzing the determinants of market conditions: supply and demand for a particular product, competitiveness, prices, goods-movement, etc. moreover, this process aimed on the identification of market challenges, the collection and processing of information about foreign markets with the gain to improve the adoption of commercial and business decisions for the creation, movement, sale, consumption of commercial products in this market.

During the selection of the foreign market an important guide for marketers is to observe the following principles of research, such as:

1) Systematic - research should be carried out systematically, rather than be a one-off;

2) System - should cover the entire foreign market and the entire structural hierarchy of market processes, facts, their dynamics and interactions;

3) Complexity - on the one hand, includes a set of actions or processes (collection, processing, analysis) and on the other using an integrated approach to the study of objects (their relationship to other processes and objects);

4) Coherence and firmness of purpose - the direction, scope, depth, detail of the research must be organically linked to the goals and objectives of the chosen market entity and reflect its real needs in the specific analytical information;

5) The multiplicity of information sources – important to have suitable flow of market information not from one but from several sources, which allows you to have a comprehensive and complementary each other sources of data, and thus it helps to specify and verify the information;

6) Universality - research can be done on the basis of any needs of a market information to make rational decisions;

7) The scientific character – build on accuracy, objectivity, conditioning, otherwise, lack of objectivity and unsubstantiated research lead to distorted advice.

The significance of research aimed on the choice of foreign market increases with the increasing use of science with the evolution of social consciousness, with the strengthening of its economic and social orientation. Addressing a wide range of marketing objectives can be realized through using different scientific techniques.

Modern science opened a variety of methodological approaches that help to make comprehensive evaluation and selection of foreign markets, viz.

Scientific methods:

1) System analysis - considers any foreign market situation with a wide range of internal and external cause and effect relation. For example, the rapid spread of mobile phones due to the scientific and technical development, business activities, and the requirement in information support.

2) An integrated approach - stipulates a manifestation of diverse and specific market conditions in the foreign markets, successful exit of which is based on the strategic and tactical decisions. Thus, the problems of implementation a particular product in a foreign market is generally determined by supply, demand, price, distribution, merchandising, and communication system, which forms a complex of marketing approaches.

3) Software-oriented planning - used in the development and implementation of marketing strategies and tactics, that is constructed (planned and programmed) all marketing activities in foreign markets.

Analytical and prognostic methods:

1) Linear programming - is a mathematical approach which is built on the idea to choose from a number of alternatives the most favorable one taking in the account costs and profits.

2) Economic and mathematical models - allows consider relevant factors of internal and external environment to evaluate the development of particular site of foreign market, the competitiveness of the product and its manufacturer, the tactics and the strategy of marketing activities during entering the market, capture and retain a niche in overseas market.

3) Economic and statistical techniques - are used for the sample, ranging patterns, determine the closeness of correlation etc.

4) Queuing theory - is used for choosing the priority in giving services to the customer, scheduling deliveries of goods, it enables us to study folding patterns of the mass inflow service requests, simultaneously, and helps correctly identify the optimal priorities for their implementation during the organization of product’s withdrawal to the overseas market.

5) Probability theory - helps make the right decisions in choosing from the possible actions the most preferable one ​​and define the probability of occurrence of certain events on the international market.

6) The theory of communication - helps to improve communication (feedback mechanism) of market participants with a specific overseas market, furthermore, enhance the effectiveness of using obtained data, allows to receive information about the signaling processes, and manage the processes of production and marketing (linking capacities with sales opportunities) and inventory (controlling revenues and shipments).

7) Network planning - provides control of execution sequence, the interdependence of action, work, individual operations as part of a particular project, and identify the main stages, the timing of their implementation, the costs for the perpetrators, providing possible deviations from the planned scenario in the process of selecting and releasing new foreign markets.

8) Business games - allow you to model and simulate the tasks and activities for both abstract and concrete subjects of foreign markets and aspiring to find the best commercial and business decisions.

Methodological techniques:

1) Sociology - studies the development of various spheres of human activity, its value orientation, moreover, promotes efficient choices in the interests, opinions, recommendations of consumers, brokers, traders about innovation.

2) Psychology - through the analysis of motivations and the tests helps to determine the behavior of overseas market subjects: consumers, manufacturers, retailers; in the same moment identifying the factors influencing their behavior.

3) Anthropology - adjusts the design, production, and implementation of commercial products to national and physical features, quality of life of individual small and large groups of consumers. Anthropological measurements are used in the modeling of furniture, clothing, shoes, hats, etc., especially, with focusing on international target markets.

4) Ecology - counted in the production of goods or services, when taking into consideration the degree of the possible negative impact of materials and products on the environment through an orientation on the concept of environmental marketing.

5) Ethics - manifested in the study of social, cultural, technical and aesthetic problems in forming the subjects of a harmonious environment creating with the aim to provide the best working and living conditions in the new discovered market.

6) Design - is used in determining the form, colors, and materials of the marketable products.

During the process of choosing a foreign market there are two main areas of research: desk and field.

Desk research includes treatment of existing secondary information about the state of the foreign market. Secondary data can help researchers more deeply acquainted with the situation in the industry, with the trends in sales and earnings, competitors, the latest achievements of science and technology. Secondary information can be contained in the both as far as external and the internal sources. Internal sources include the company's own statements, which shows the current sales, profit and loss account, the amount of the costs, the amount of inventory, cash flow, accounts of previous market research. The external sources that contain secondary information include: the publication of state institutions, and the regional and federal statistical surveys, surveys on foreign markets, periodicals, like professional journals on economics, trade, business, international marketing, etc.

Field research involves collecting and processing the data specifically for research based on the choice of foreign market using the primary information. This research builds on the result of its own research and in this case the foreign markets sharply differ by novelty, because received original information about products and customers, due to the fact that the data are collected in accordance with the precise objectives of the study.

Researchers are studying the characteristics of the foreign market, carry out measurements of its potential, analyzing the distribution of market shares between firms, analyze sales, examine the trends in business activity, competitors' products, investigate pricing policies, carry out short-term and long-term forecasting. The methods of obtaining primary data include a survey, experiment and observation.

Enterprise cannot use all the methods of research in choosing a foreign market, as it leads to significant costs of material resources. Therefore, based on objectives of the study in choice of the foreign market, financial and time options the company usually selects one of the research methods or their combination. Mainly, through desk research to gathering information about foreign markets, their trends of development; and with the help of field research collecting detailed information about customers, intermediaries, and producers. (Kuada, 2008)

Approaches to the choice of entry mode

Making correct choice in selection of entry mode requires a systematic and careful analysis build on identification maid goal or purpose of company; moreover, it should be taken in to account all possible alternatives presented by every entry mode. Choosing entry mode and development strategies must be specifically adapted to each market and product. There are four main approaches for determination the most suitable foreign market entry and development mode:

The economical approach is a choice of foreign market entry based on rational behavior and characterized identification alternative costs and benefits of the choose entry mode on the base maximizing the profits in the long-run. Aimed on determination cost of the transaction which is based on analysis all possible risks and return of investment what helps for further identification appropriate mode of entry. Bought return of investment and rick must be realized through highly controlled processes; however, high control can lead to increasing risk and return, on the other head, low control reduces resource commitment and risk what can caused difficulties in attracting return of investment. Thus, for company management important to find compromise entry mode that can help to keep low level of risk, high return of investment, and resource commitment on different levels of control.

Another one approach for determination of foreign market entry and development mode is named the stages-of-development approaches and based on incremental model of internationalization. This model represents different stages of gradual companies’ development and their implementation on foreign market over time what can be identified through enlarging foreign sales and international experience. This approach implemented through few different entry modes options which appropriate for all stage of companies’ international expansion; moreover, it require incremental selection of appropriate mode of entry with possible shifting to the other one. Changing the entry mode takes place when previous choice led to the inadequate results, for example, because of low profit or shifting from exporting to more high form of involvement in the foreign market.

The main characteristic of business strategy approach is focused on the pragmatic instead of rational approach to decision making compare with previous two approaches. Nature of the business strategy approach bases on political and internal uncertainty of decision making, especially in the case of international markets servicing decisions. This approach of choosing foreign market entry mode contains from several objectives for expanding abroad and usually between them takes place different conflict, because of difficulties in combination of the uncertainty and the companies objectives, especially for SME’s because they often faced a problem of limited resources.

On the figure 1.1 (Young, Hamill, Wheeler & Davies, 1989) described different stages of identification the most appropriate market entry mode.

Figure 1.1 Model for determination ideal market entry and development strategy.

Source: Adapted from [6, p. 265]

First of all, companies’ management should implement examination of choosing the entry modes alternative that to further discard all possible alternatives which is not suitable for given some of the external factors like a, law and regulation, market size or limitation of the companies resources. Secondary, company must calculate and compare the entry mode alternative profitability. And finally, company must execute work on analyzing and ranking all the entry mode alternatives basing their estimation on the political risk, net profits, and the companies’ non-profit objectives.

The last in the list is alternative entry mode selection approach which builds on assumption that firms can have multiple objectives for entering new foreign market, for example in could be between short-tern profitability and long-term market penetration.

In the figure 1.2 described model for evaluation the relevance of using various entry modes build on suggestion that that most appropriate entry mode must combine the multiple objectives which contain nonprofit and profit objectives.

Figure 1.2 Model for selection the most appropriate foreign market entry and development mode.

Source: Adapted from [6, p. 267]

First of all, it should be making a clear statement of companies’ main objectives taking into the account both the long-term and short-term objectives, nonprofit and profit objectives and the wider strategic objectives. Moreover, usually conflicts between the company’s objectives take place. So, next step is to rank the objectives with the aim that to identify their relative importance for achieving higher company’s gain; however, important to build evaluation company’s objectives using analysis in the previous approaches, since that methodology helps to consider system of ranking the main objectives taking in to the account internal and external factors.

Next task is to estimate the relative suitability of the entry mode strategies in reaching these objectives. Moreover, company should make an overall ranking evaluation build on the idea to identify relative attractiveness of various entry modes alternative in the prospect to detecting rapidity of company’s achieving the objectives. Financial costs, risk, degree of control, and managers’ commitment are the main factors that influence on the ranking system.

The principle advantage of this approach is that this model taking in the consideration using multiple objectives for expansion on the new foreign markets and using long-run and short-run, profit and non-profit objectives for choosing appropriate entry mode. (Young, Hamill, Wheeler, Davies, 1989)

Entry mode selection rules

According to Hollensen (1998) there are three main rules for choosing entry mode: the naive rule, the pragmatic rule and the strategy rule. All this rules described below due to the degree of their sophistication.

The main idea of naive rule is consist in selection the same entry mode for all foreign markets and it use when managers consider only one way to enter a foreign market.

This rule does not take into the consideration individuality to the approach to the different markets using various market entry modes. The main disadvantage of naive rule is that companies cannot exploiting at full capacity all opportunities for expansion on new foreign markets. (Aldam, Strandskow, Duerr, 1998)

In the case of pragmatic rule usually companies use the different modes for every foreign market; moreover, they generally begin with export as far as it is one of the low-risk entry modes, but in the case of it not profitability possible further change of entry mode to another one. Mainly, companies do not pay a lot of attention on choosing entry mode and do not take in to the consolidation suitability of selected option. (Hollensen, 1998) The advantages of the pragmatic rule next: minimization of risk to choice wrong entry mode due to rejection all inappropriate option and low cost of information and management since not all entry mode alternatives are investigated. But the main disadvantage is losing company’s time, resources, money and capabilities in the process of selection the most suitable mode of entry. (Aldam, Strandskow, Duerr, 1998)

The strategy rule is based in the idea that companies systematically evaluate and compare all possible entry modes before making a decision. This means that company must choice the most appropriate entry mode that helps to maintain high profit contribution over planned period taking in to the account the risk, availability of resources and the nonprofit objectives. (Hollensen, 1998) Complication of the strategy rule lie down in comparing the entire entry mode alternative and analyzing numerous objectives that might impact on company’s performance. Since it is quite difficult to identify perfect model for obtaining most appropriate entry mode; therefore, companies can rely only on their own judgment and make range of difficult and overall estimation. (Aldam, Strandskow, Duerr, 1998)

For the company aimed to enter the new international markets, one of the most important decisions is the choice of entry strategy in to new market.

Choice of suitable export market entry depends on the following factors:

Higher profits due to a larger volume of sales of goods and services in foreign markets;

More favorable investment climate for foreign economic activities in selected markets;

Dispersal of business risk between domestic and foreign markets;

The distribution of R & D costs over a large volume of production;

The decline of demand on goods in the domestic country, that can be compensated by it raising in the foreign market;

Increase the prestige of the company, which has become an international, etc.

At the same time should be taken into account such factors that oppose to making correct decision in choosing appropriate mode of entry in the foreign market:

Profits may not be as high as expected, due to the instability of the national currency of the exporter, the political and the economic situation abroad;

Penetration and consolidation on an unknown foreign markets can require significant resources; moreover, achievement may not match with the planned results and the possibilities of the company;

Products adaptation to the demands of foreign markets can be very expensive or unrealistic.

All these and similar arguments "for" and "against" should be taken into account when the company reaching the level of international marketing. Making a positive decision should be based on the fact that access to foreign market opens up new prospects for the company, which justifies all the real costs and risks involved in their implementation. (Kotler, 2002)

Entry modes on international market

Exporting

Export is one of easies and efficient way for company to expand and get involved into a foreign market. Exporting is a process of transferring produced goods and services in one country to another. It divides on two groups: occasional exporting is the process in which company is involved from time to time exporting of product at in own initiative or in accordance with the unsolicited order from foreign country. On the other hand, active export deals with the commitment of a company to expand its exports to a particular territory or market. In the bought cases, the production of goods takes place in the domestic country and may or may not be adapted to demands of foreign market.

There are two main types of exporting:

Direct exporting means direct selling to customers interested in proposed products.

This process can be implement directly sales to the end user or realized thought sales representatives, distributors, or foreign retailers. This process implicates a large commitment in financial and human resources. Moreover, it requires a lot of time that to build relationships, carry out marketing and understand market, negotiate deals.

Advantages of direct exporting are:

Higher potential profits due to elimination intermediaries

Full control of brand and in price level

Limitation of risk due to low value of exportation process

Identification and customization of consumer’s needs

Engagement in direct customer relationship

Possibility to identify future opportunity

Disadvantages of direct exporting are:

It require a lot of money ,energy, human resources, and time

Logistical considerations

Comparative advantage of local competitors in suggesting a lower risk and quicker respond

Requirement in local language capability for after-sales service and commissioning

Demanding more responsibility of servicing the business on every level of your organization

Slow growth due to difficulties in penetration on new markets

Requirement in additional visits in the case of prompt troubleshoots which cannot be removal on distance

Indirect exporting requires selling through or to an intermediary. It is comparable straightforward and cheap way to entering in the new foreign market. Moreover, a good intermediary can be inclined to have good reputation, contacts, and in-market experience what can help quickly and easily to grand products and services to the end user and generate stable increasing in income and prestige consolidation of new brand. Generally, this process does not require responsibility in collection payment from customers or coordination the shipping logistics. There are few types of export intermediaries:

Domestic-based export merchant who is generally buy produced items and then sell them to foreign consumer under their own brand names.

Domestic-based export agents who are able to receive commission from negotiation and searching of foreign customers.

Cooperative organizations support exporting process together with some production companies and are subject to their partial administrative control.

Export-management companies provide control for internal management export activity for one or more supplier for a fee.

Advantages of indirect export:

Fast access and implementation to new market

Require less of investment

Involve less risk

Avoiding direct involvement in exporting process

Disadvantages:

The intermediary still needs monetary reward and sales support

Wrong choice of distributor or market can lead to inadequate market feedback and further potentially low sales turnover

Lack of requirement in discovering overseas market what in future can lead to problem with company’s development in long-run

Lack of direct contact with the end user (Geetanjali, 2010)

Licensing

Licensing is one of easiest market entry strategy for penetration in new international markets. Company (licensor) enters into an agreement with another company (licensee) in the foreign market, offering the right to use a manufacturing process, trademark, patent, trade secret, or any other value in exchange for a fee or license fee (royalty). Usually, the licensor shall provide technical information and assistance, and the licensee effectively uses the resulting rights and pays the licensor a certain amount. Licensee, in turn, receives the benefits associated with the use of innovative ideas (knowledge), new technologies, progressive work experience, or product (brand).

However, the licensing associated with the following problems:

1) the inability of the licensor constantly and strictly control the activities of the licensee;

2) a high probability of creating a powerful competitor in the market by company licensor at the end of the term of license agreement (contract);

3) reduction of the licensor company's revenue in the case of long term license agreement.

In practice, there are several methods (forms) of the licensed activity: management contract, contract manufacturing and franchising.

Management contract implies that a certain company for a fee manages the property (enterprises) of another company located in the territory of a foreign state. In this case, the management company exports to foreign markets management services not a production. This type of activity has the following advantages:

a) Minimization or the risk in the foreign market

b) rapid revenue generation (almost from the start of activity) and the possibility of an increase in the case of successful management

c) the lack of competition in this market from the client

d) the possibility of a thorough study of the characteristics of foreign markets and the impact on its foreign client.

In addition, the license agreements of this type are particularly attractive if the management company provide the option to purchase the shares (share of property) of a foreign company for a certain period of time or if the contract foresee increased compensation for effective management.

However, along with the obvious benefits of this form of licensing there are couple limitations. The main ones are:

- Management company loses the opportunity to develop an independent business in the market for a period stipulated in the contract;

- Must have a solid staff of highly qualified managers who are ready to work abroad for the duration of the license agreement.

Another form of the licensed activity is the contract manufacturing: when the company requests the production of their products to firms located in foreign markets. In this case, the company gets a clear advantage in the rapid exit of its products to overseas markets, a low level of risk, the possibility of creating afterwards own corporation or joint venture. The disadvantages of the contract manufacturing for the licensor include: impossibility to implement constant control over the production process, the difficulty of obtaining operational marketing information on changes in demand for the products, trade conditions in foreign markets, etc.

Franchising - the most advanced form of licensing. Licensor (franchisee) transmits his trademark and manufacturing and / or marketing of technology in return for a stipulated in the contract amount of money (compensation).

Feature of the franchise is that each buyer undertakes to fulfill the various conditions and requirements of the seller (franchiser), related to the production & sale of goods and the provision of related services to consumers. Thus, in the world market there are groups of companies united in a single system under the auspices of a major international corporation.

Its partners in the contract the franchisor provides advice on corporate location, selects equipment, helps in training, advice on management, and may also provide financial assistance. All this facilitates the standardization and unification of products and services of the companies included in the system of franchising provides unity on market events, style and design, the quality of goods and services sold the centralization of procurement related savings (and the additional benefit to the franchisor).

Advantages of franchising mode:

Rapid expansion of sales markets, the increase in sales volume and the territorial expansion of the business

Absence of the cost of the vertically-integrated network management (reduction of personnel costs)

A lower level of own capital investment

Lift the prestige of the company and its trademark, recognition from the customers, increased confidence in the quality and range of products a single company

Income from the sale of the license and renting real estate franchise and equipment

Profit from lending opportunities franchisees and reducing the time of turnover.

Disadvantages of franchising mode:

The likelihood of a smaller part of the profits from the franchise business than on their own

Low reputation of one of the franchises in the absence of proper quality control can affect the reputation of the firm;

Difficulty in controlling the reliability of financial reporting franchisee

The franchisor is preparing a possible competitor in the face of franchisee company (Kotler, 2002)

Joint ventures

Joint ventures are often created for access to foreign markets, company’s decision to team up with their foreign partner, sharing ownership and control over the activities of the company. In world practice, there are many examples of well-known association of firms and corporations to tap new markets and gain competitive advantage.

Creation of a joint venture may be the preferred method of access to foreign markets for the following reasons:

- If the company lacks the financial, technological, managerial and other resources for self-development in foreign markets

- If the government does not admit to its market foreign companies or subsidiaries without the participation of local capital for some political or economic reasons;

- When the company, for economic reasons, team up with a foreign company for the joint production, the sale of which will provide the company higher profits due to the low cost of use of local resources (labor, raw materials, etc.)

However, with all advantages of the using joint venture as entry mode for entering and presenting on the international market there are a few problems, the main ones are:

1. Contradictions between the partners in the joint venture what may be related to different points of view on the use of the profits of the enterprise, management and implementation of marketing activities, areas of investment, and etc.;

2. The need for a strong partnership in the creation and funding of the joint venture may hamper the implementation of the transnational corporation its own, universal for all countries production and marketing policy. (Kotler, 2002)

Foreign direct investment

The most complete form of the involvement of a foreign market is the investment of capital in the creation own overseas assembly and production plants. The meaning of direct foreign investment is defined by the so-called concept of control. The main idea of this mode of entry is that a foreign investor investing in the purchase or construction companies abroad controls further management decisions in this venture. And he does not have to have a 100% ownership interest in it; even a small percentage of shares may be sufficient to establish control over decision-making.

On the other side, even all shares do not provide absolute control: if the government dictates whom the company should hire, distribution of revenue, what should company sell and at what price. However, usage of this foreign market entry mode includes several advantages:

- All the profit from investments belongs to the company and it can use it at its own discretion, carrying out their own long-term production and marketing strategies;

- The firm can increase its profits thought gaining working experience in a large international market with the help of usages local cheap raw materials, labor, saving on transportation costs, etc., as well as expanding sales and conducting effective marketing activities;

- Paying taxes to the budget of the foreign state and creating jobs, the company can secure a favorable image in government and among the population;

- Due to establishing close favorable relations with suppliers, distributors, agents and customers the company can better adapt its products, services and marketing programs to the characteristics of the foreign market, thus constantly improving its competitiveness.

Direct investment capital to the foreign market is carried out in two forms: the export of venture capital and loan capital.

Venture capital imported into the international market in the form of direct and portfolio investment. Direct investment involves the purchase or acquisition of the total local company’s controlling stake. Portfolio investment means buying shares of local companies that are insufficient to establish control over them.

Loan capital is loans provided by states, companies, banks, administrative regions, municipalities, etc. Loans divided on two groups: short-term (up to two years) and long term (over two years). (Kotler, 2002)

Turnkey projects

Turnkey project refers to the conclusion of a contract on construction of company that will be transmitted for a nominal fee to the owner when it will be ready for full exploitation. Usually companies that implement such projects are manufacturers of industrial equipment; moreover, they supply part of the equipment for the project. Very often such projects involved participation of construction companies. Sometimes in such a role using the consulting firms and equipment manufacturers, in the case when company not able to find other suitable object for investment in host country.

The main advantage of turkey projects is opportunity for a corporation is to make a profit in a foreign market and build the plant, especially, in the areas with lack of expertise and with limited access for direct investment.

One of disadvantages of using turkey projects time as foreign market mode entry could be risk of disclosure company’s secrets to the competitions and possible take-over by the host county main firm’s plants. The same as in the case with contract management company used the turkey projects unwillingly could create future competitor. However, many companies are ready to design and build facilities in other countries, especially when there are limitations on foreign ownership. (Subba Rao, 2010)

Modes of entry in the foreign market for the banking sector

The most critical stage if internationalization bank’s activity is the development strategy for entering it on foreign market. Correctly formed strategy is a determining factor of success for bank in the chosen market. Current approaches to develop a strategy of internationalization based on the use of the fundamental provisions of the strategic management and bank management. The main characteristic of this strategy is, first of all, its focus on middle- and long-term perspective for development of the international activities of the bank, rather than to improve financial performance of the bank in the short term.

Mainly alternative strategy of entering foreign market for banking sector divided into three basic groups:

1. Strategies for creating their own overseas bank units.

2. Strategy acquisition of holdings and acquisition of existing foreign banks until the establishment of full control over their activities.

3. Strategies for creating a strategic alliance.

The choice of particular strategy depends on many internal and external factors bank activity in the foreign market and the chosen strategy of internationalization. All characteristics, advantages and disadvantages of presented strategies have given below. (Lehner, 2009)

Wholly owned subsidiary

A subsidiary company 100% of outstanding common stock of which belongs to parent company names a wholly owned subsidiary.  There are two ways how company can became a subsidiary as a branch of the parent company or by acquisition. Generally, using subsidiary can be very helpful in the process of entering new international markets by the parent company. Mainly, a wholly owned subsidiary builds on the two approaches acquisitions and Greenfield investment.

Acquisition is a process of merger with the company or incorporated into the structure of the company in the country of the target market. It aimed on increasing presence in the target market and on the orientation of the high level of sales, purchases and efficiency.

Acquisition strategy offers the rapid expansion through existing distribution channels, brands, technologies, etc. However, from the cost site this approach requires a large labor and capital costs, deep expertise about the country of the target market, and also significant (cross-cultural) management skills (eg, post-merger integration).

From the aspect of control and coordination acquisition gives a full control over the parent company in the strategic and operational management due to the hierarchical coordination and but in the same moment require the high cost of coordinating the interaction with the parent company.

There are few ricks. First of all, choosing a suitable object of merger or acquisition is partly a long process. Secondary, huge sunk costs in the case of a failed merger or acquisition. Another one disadvantage is a concealed defect of the acquired company. And the last is difficulties in the integrating the acquired company.

The main disadvantages of acquisition presented below:

Allows quickly enter the international market using existing structures;

Helps to overcome own technological obsolescence or disadvantages;

Stimulate the elimination of negative image in the country of the target market.

Acquisition strategy may be less risky than Greenfield investment.

Greenfield investment is the process of formation of a new wholly owned subsidiary and the main feature is that products or services independently implements sales office or subsidiary in the country of the target market. It gives a full control of the parent company of a subsidiary but in the same moment this process can be potentially costly, moreover it require the high costs on coordination of interaction with the parent company.

Advantages:

Overcoming trade barriers;

Direct development of the target market and the establishment of the business relationship (customer intimacy);

Obtaining knowledge about the market and consumers;

The ability to localize the company, products and marketing;

Costs of optimization (no the cost of transportation, storage, export marketing)

Disadvantages:

High sunk costs in case of failure entering the new market;

Necessity in additional expertise and acquirement of knowledge about new market’s competitors, consultants, or new business partners.

High cost of entry strategy, because it require a lot of time that to establish the distribution networks, new operations, and appropriate marketing strategies that to have opportunity to compete with foreign rivals.

Potential economic, political, and legal risks. (Lehner, 2009)

Strategic Alliance

Strategic Alliance is a partnership between the firms in which the resources, capabilities and core competencies of firms combined to achieve the best result. Alliance means cooperation between different groups, which gives better results than those that could be obtained from a simple transaction. Because competitive markets continue to improve the benefits from deals, alliances can be still remains a market leader only making continuous improvements on the all levels of management.

In the modern dynamic economy, strategic alliances allow businesses to create competitive advantage through access to the resources and abilities of the partner, such as markets, technologies, capital and people. Creating a team allows both parties to synergistically increase their resources and capabilities and thus grow and expand quickly and efficiently.

The objectives of international alliances include:

risk reduction;

economies of scale up production;

exchange of advanced technologies;

elimination or reduction of competition;

overcoming the state of trade and investment barriers in entering the promising overseas markets.

There are four types of strategic alliances:

alliances with equity participation in existing plants;

strategic alliances with the creation of new companies (joint ventures);

consortium for investment projects;

alliances with weak co-operation. (Lehner, 2009)