1. What are the various method to entry in the foreign market?

Ans:

The decision of how to enter a foreign market can have a significant impact on the results. Expansion into foreign markets can be achieved via the following four mechanisms:

  • Exporting
  • Licensing
  • Joint Venture
  • Direct Investment

Exporting

Exporting is the marketing and direct sale of domestically-produced goods in another country. Exporting is a traditional and well-established method of reaching foreign markets. Since exporting does not require that the goods be produced in the target country, no investment in foreign production facilities is required. Most of the costs associated with exporting take the form of marketing expenses.

Exporting commonly requires coordination among four players:

  • Exporter
  • Importer
  • Transport provider
  • Government

Licensing

Licensing essentially permits a company in the target country to use the property of the licensor. Such property usually is intangible, such as trademarks, patents, and production techniques. The licensee pays a fee in exchange for the rights to use the intangible property and possibly for technical assistance.

Because little investment on the part of the licensor is required, licensing has the potential to provide a very large ROI. However, because the licensee produces and markets the product, potential returns from manufacturing and marketing activities may be lost.

Joint Venture

There are five common objectives in a joint venture: market entry, risk/reward sharing, technology sharing and joint product development, and conforming to government regulations. Other benefits include political connections and distribution channel access that may depend on relationships.

Such alliances often are favorable when:

  • the partners' strategic goals converge while their competitive goals diverge;
  • the partners' size, market power, and resources are small compared to the industry leaders; and
  • partners' are able to learn from one another while limiting access to their own proprietary skills.

The key issues to consider in a joint venture are ownership, control, length of agreement, pricing, technology transfer, local firm capabilities and resources, and government intentions.

Potential problems include:

  • conflict over asymmetric new investments
  • mistrust over proprietary knowledge
  • performance ambiguity - how to split the pie
  • lack of parent firm support
  • cultural clashes
  • if, how, and when to terminate the relationship

Joint ventures have conflicting pressures to cooperate and compete:

  • Strategic imperative: the partners want to maximize the advantage gained for the joint venture, but they also want to maximize their own competitive position.
  • The joint venture attempts to develop shared resources, but each firm wants to develop and protect its own proprietary resources.
  • The joint venture is controlled through negotiations and coordination processes, while each firm would like to have hierarchical control.

Foreign Direct Investment

Foreign direct investment (FDI) is the direct ownership of facilities in the target country. It involves the transfer of resources including capital, technology, and personnel. Direct foreign investment may be made through the acquisition of an existing entity or the establishment of a new enterprise.

Direct ownership provides a high degree of control in the operations and the ability to better know the consumers and competitive environment. However, it requires a high level of resources and a high degree of commitment.

The Case of EuroDisney

Different modes of entry may be more appropriate under different circumstances, and the mode of entry is an important factor in the success of the project. Walt Disney Co. faced the challenge of building a theme park in Europe. Disney's mode of entry in Japan had been licensing. However, the firm chose direct investment in its European theme park, owning 49% with the remaining 51% held publicly.

Besides the mode of entry, another important element in Disney's decision was exactly where in Europe to locate. There are many factors in the site selection decision, and a company carefully must define and evaluate the criteria for choosing a location. The problems with the EuroDisney project illustrate that even if a company has been successful in the past, as Disney had been with its California, Florida, and Tokyo theme parks, future success is not guaranteed, especially when moving into a different country and culture. The appropriate adjustments for national differences always should be made.

Comparision of Market Entry Options

The following table provides a summary of the possible modes of foreign market entry:

Comparison of Foreign Market Entry Modes

Mode / Conditions Favoring this Mode / Advantages / Disadvantages
Exporting / Limited sales potential in target country; little product adaptation required
Distribution channels close to plants
High target country production costs
Liberal import policies
High political risk / Minimizes risk and investment.
Speed of entry
Maximizes scale; uses existing facilities. / Trade barriers & tariffs add to costs.
Transport costs
Limits access to local information
Company viewed as an outsider
Licensing / Import and investment barriers
Legal protection possible in target environment.
Low sales potential in target country.
Large cultural distance
Licensee lacks ability to become a competitor. / Minimizes risk and investment.
Speed of entry
Able to circumvent trade barriers
High ROI / Lack of control over use of assets.
Licensee may become competitor.
Knowledge spillovers
License period is limited
Joint Ventures / Import barriers
Large cultural distance
Assets cannot be fairly priced
High sales potential
Some political risk
Government restrictions on foreign ownership
Local company can provide skills, resources, distribution network, brand name, etc. / Overcomes ownership restrictions and cultural distance
Combines resources of 2 companies.
Potential for learning
Viewed as insider
Less investment required / Difficult to manage
Dilution of control
Greater risk than exporting a & licensing
Knowledge spillovers
Partner may become a competitor.
Direct Investment / Import barriers
Small cultural distance
Assets cannot be fairly priced
High sales potential
Low political risk / Greater knowledge of local market
Can better apply specialized skills
Minimizes knowledge spillover
Can be viewed as an insider / Higher risk than other modes
Requires more resources and commitment
May be difficult to manage the local resources.
  1. What are various environmental factors that affect International Business?

Ans:

A company that chooses to implement an international project is obligated to conduct a thorough research in order to understand if such project is viable and can be brought to life in a certain country. Numerous factors have to be taken into consideration and investigated; it has to be done objectively from the point of view of the host country in which business will be performed. Thus the home company can ensure the realization of the project in specified terms with regards to projected profits and spending funds.

While analyzing foreign environment companies have to pay close attention to various factors that will effect, or help if used efficiently, future success of business in a new economy. First of all it is necessary to carefully examine the firm’s competitive position and understand if a project is able to bring profit in the global industry. Adequate financial resources, successful global ventures in the past, risk levels that a company is able to undertake and growing international demand are those few questions that need to posed before a firm can make any projections as to doing business abroad. There are also factors that are directly connected to specific projects and situations and that influence the outcome of the venture and have to be considered.

In case when a company is ready to start international project in terms of its internal situation, it has to study issues and challenges that are caused by macro economical and other environmental factors. Legal and political factors are essential for the implementation of the project abroad and each country has its own laws and regulations that could be of negative or positive influence which greatly depends on the nature of business. Economic condition of the host county is a core issue in deciding where and when project will be carried out and if it is feasible at all. Such environmental issues as GDP, inflation fluctuations and population growth have to be considered in order to comprehend conditions in which business will operate. Infrastructure and geography are among other factors that will affect the project or not allow its execution in case a host county has severe weather conditions or undeveloped infrastructure; for instance unpaved roads and no electrical power can easily fail the project in the very beginning and thus knowing such conditions is necessary. Security of the country in which project will be developed is essential as well, people make things happen and if they are in a dangerous environment it is priory impossible to do business. Workers who are knowledgeable about cultural differences in a host country are more likely to perform successfully as traditions and holidays can play a huge role in certain marketing campaigns and serve for the good image of the company.

Working in a foreign country requires a great deal of preparation and assessment of all possible differences that the business is about to encounter. As was already said, major role in deciding whether or not the project will be successful is comprehending macro environment of a new country. Studying its economical condition, security levels and infrastructure system is a core competence of a company who wants to be more successful that its competitors. In case when all of those factors are studied and considered advantageous for a new enterprise, it is important to bear in mind that cultural differences can make all efforts void. Thus businesses must attentively analyze what changes have to be made in the business plan and what people are best suit for its implementation. Often, companies hire professionals already experienced in such ventures with foreign education who speak two or more languages. Those intermediaries who are familiar with host country’s traditions and have social connections are great helpers in establishing a good image of the company abroad and in avoiding mistakes in a setting up period.

Selecting and training employees for the international project is very important for the future success of the company. Culture shock and coping with it are issues that have to be addressed to potential workers. Consequently firms need to inform and train employees on how to cope with cultural diversities and benefit from them to better manage in the new environment.

  1. Give ten reasons why FDI is beneficial to developing Economy?

Ans:

Foreign direct investment (FDI) was founded by Aziz Mahdi and is a measure of foreign ownership of productive assets, such as factories, mines and land. Increasing foreign investment can be used as one measure of growing economic globalization.

A foreign direct investor may be classified in any sector of the economy and could be any one of the following:

  • an individual;
  • a group of related individuals;
  • an incorporated orunincorporated entity;
  • apublic companyorprivate company;
  • a group of related enterprises;
  • a government body;
  • anestate (law),trustor other societal organisation; or
  • any combination of the above.

Foreign direct investment(FDI) policies play a major role in the economic growth ofdeveloping countriesaround the world. Attracting FDI inflows with conductive policies has therefore become a key battleground in theemerging markets.

Developed countries also seek to bring in more FDI and use various policies and incentives to attract overseas investors, particularly for capital-intensive industries and advanced technology.

The primary aim of these policies is to create a friendlybusiness environmentwhere foreign investors feel comfortable with the legal and financial framework of the country, and have the potential to reap profits from economically viable businesses. The prospect of new growth opportunities and outsized profits encourages large capital inflows across a range of industry and opportunity types.

IN INDIA

(FDI) in India has played an important role in the development of the Indian economy. FDI in India has - in a lot of ways - enabled India to achieve a certain degree of financial stability,growth and development. This money has allowed India to focus on the areas that may have needed economic attention, and address the various problems that continue to challenge the country.
India has continually sought to attract FDI from the world’s major investors. In 1998 and 1999, the Indian national government announced anumberof reforms designed to encourage FDI and present a favorable scenario for investors.
FDI investments are permitted through financial collaborations, through private equity or preferential allotments, by way of capital markets through Euro issues, and in joint ventures. FDI is not permitted in the arms, nuclear, railway, coal & lignite or mining industries.
Anumberof projects have been announced in areas such as electricity generation, distribution and transmission, as well as the development of roads and highways, with opportunities for foreign investors.
The Indian national government also provided permission to FDIs to provide up to 100% of the financing required for the construction of bridges and tunnels, but with a limit on foreign equity of INR 1,500 crores, approximately $352.5m.
Currently, FDI is allowed infinancial services, including the growing credit card business. These services include the non-bankingfinancial servicessector. Foreign investors can buy up to 40% of the equity in private banks, although there is condition that stipulates that these banks must be multilateral financial organizations. Up to 45% of the shares of companies in the global mobile personalcommunicationby satellite services (GMPCSS) sector can also be purchased.
By 2004, India received $5.3 billion in FDI, big growth compared to previous years, but less than 10% of the $60.6 billion that flowed into China. Why does India, with a stable democracy and a smoother approval process, lag so far behind China in FDI amounts?
Although the Chinese approval process is complex, it includes both national and regional approval in the same process.
Federal democracy is perversely an impediment for India. Local authorities are not part of the approvals process and have their own rights, and this often leads to projects getting bogged down in red tape and bureaucracy. India actually receives less than half the FDI that the federal government approves.

INVESTMENT BY NON RESIDENT INDIANS & OVERSEAS CORPORATE BODIES

For all sectors, excluding those falling under Government approval, NRIs (which also

includes PIOs) and OCBs (an overseas corporate body means a company or other entity owned directly or indirectly to the extent of at least 60% by NRIs) are eligible to bring investment through the automatic route of RBI. All other proposals, which do not fulfil any or, all of the criteria for automatic approval are considered by the Government through the FIPB (Foreign Investment Promotion Board).

The NRIs and OCBs are allowed to invest in housing and real estate development sector, in which foreign direct investment is not permitted. They are allowed to hold up to 100 percent equity in civil aviation sector in which otherwise foreign equity only up to 40 per cent is permitted.

BENEFITS OF FDI:

Economic growth-This is one of the major sectors, which is enormously benefited from foreign direct investment. A remarkable inflow of FDI in various industrial units in India has boosted the economic life of country.
Trade-Foreign Direct Investments have opened a wide spectrum of opportunities in the trading of goods and services in India both in terms of import and export production. Products of superior quality are manufactured by various industries in India due to greater amount of FDI inflows in the country.
Employment and skill levels-FDI has also ensured a number of employment opportunities by aiding the setting up of industrial units in various corners of India.
Technology diffusion and knowledge transfer-FDI apparently helps in the outsourcing of knowledge from India especially in the Information Technology sector. It helps in developing the know-how process in India in terms of enhancing the technological advancement in India.
Linkages and spillover to domestic firms-Various foreign firms are now occupying a position in the Indian market through Joint Ventures and collaboration concerns. The maximum amount of the profits gained by the foreign firms through these joint ventures is spent on the Indian market.

DISADVANTAGES OF FDI:

At times it has been observed that certain foreign policies are adopted that are not appreciated by the workers of the recipient country. Foreign directinvestment, at times, is also disadvantageous for the ones who are making theinvestmentthemselves.
Foreign directinvestmentmay entail high travel and communications expenses. The differences of language and culture that exist between the country of theinvestorand the host country could also pose problems in case of foreign directinvestment.
Yet another major disadvantage of foreign directinvestmentis that there is a chance that a company may lose out on its ownership to an overseas company. This has often caused many companies to approach foreign directinvestmentwith a certain amount of caution.
At times it has been observed that there is considerable instability in a particular geographical region. This causes a lot of inconvenience to theinvestor.

CURRENT EVENTS RELATED TO FDI:

IAF Vice Chief Air Marshal P K Barbora said that private industry's participation be increased in the defence sector and India should be "bold enough" to allow more FDI in the area.

The Foreign Investment Promotion Board has rejected a proposal by the Jaipur IPL Cricket Pvt to induct 100% foreign equity by issuing shares for a non-cash consideration. While approving 17 foreign direct investment proposals worth Rs 1,159

crore at its October 30 meet.

The FIPB, will refer foreign investments in sensitive sectors to a committee of secretaries. The panel will have representatives from various government departments. The crucial difference will be that the committee will be time bound and will have specific parameters to weigh the risks.