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Overseas business by a company refers
to undertaking and expanding its commercial activities across the national
borders. It encompasses diverse nature of activities like trading (exporting
and importing its goods and services); manufacturing and marketing as
well as outsourcing for production and marketing. The main reason for
making such overseas investments is to explore business opportunities
abroad and take advantage of such opportunities. Foreign markets in both
developed and developing countries provide enormous growth opportunities.
For example, a number of Indian pharmaceuticals firms have achieved a
much faster growth of their overseas business. The various other reasons
for investing abroad are:-
- Competition is the main driving force
behind internationalism. Until liberalisation in 1991, the Indian economy
was a highly protected market. Not only that the domestic producers
were protected from foreign competition, but also domestic competition
was restricted by several policy induced entry barriers. The economic
liberalisation and globalisation has ushered in increased competition
both domestically and internationally.
- Government policies and regulations
also motivate internationalism. Many Governments offer a number of
incentives and other positive support in order to encourage foreign
investments. Restrictive domestic Government policies which limit the
scope of business expansion in domestic country and undermines their
competitiveness is also an important factor for entering overseas markets.
- Domestic demand constraints drive
many companies to expand their markets beyond the national borders.
If the domestic market potential is fully tapped, the market for such
products tends to be saturated. Another type of domestic market constraint
arises from the scale-economies. The technological advances has increased
the size of optimal scale of operations in many industries, thus making
it necessary to have foreign markets in addition to domestic ones. Domestic
recession often provokes the companies to explore foreign markets.
- It may also help the company to improve
its domestic business, increase its market share and help establish
the image of the company.
Business strategy relating to overseas
investment differs from that of domestic investment due to the differences
in business environment:-
- The political environment includes
the characteristics and policies of the political parties, nature of
the constitution and the governmental system. These factors vary considerably
between different nations.
- The legal system that exists in different
countries across the world may be classified into common law, civil
law or code law and theocratic law. Common law is based on tradition,
past practices and legal precedents set by the courts through interpretation
of statutes, legal legislations and past rulings. Code law, on the other
hand, is based on an all-inclusive system of written rules of law. While
the theocratic law is based on religious precepts. These differences
in the legal framework play a very important role in overseas investment
strategy.
- Cultural differences are one of the
most important factors influencing international investments. The cultural
or social environment of any country encompasses language, religion,
customs, traditions and beliefs, tastes and preferences, social stratification,
social institutions,etc.
- Economic environment also varies from
country to country. It broadly includes the nature and level of development
of the economy, economic resources, size of the economy, economic systems
and economic policies, economic conditions,trends in various economic
indicators like national income, per capita income, foreign trade, inflation
rate, industry production, etc.
However, a firm which plans to invest
abroad has to make a series of strategic decisions:-
- The first decision a company has to make is whether
to expand its business abroad or not. This decision is based on consideration
of number of important factors like:-
- Present and future opportunities
- Present and future market opportunities
- The resources of the company like
skill,experience, financial support, production and marketing capabilities,etc.
- Company's objectives.
- Once the company has decided to invest
abroad, the next important decision is the selection of the most appropriate
market. For this, a thorough analysis of the potentials of the various
overseas markets and their respective marketing environment is essential.
- The next important decision relates to determining
the appropriate modes of entering those foreign markets. The important
foreign market entry strategies are:-
- Exporting: is the most
traditional mode of entering a foreign market. It is an appropriate
strategy when any of the following conditions prevail:- (i) the
volume of foreign business is not large enough to justify production
in the foreign market; (ii) cost of production in the foreign market
is high; (iii) the foreign market is characterised by production
bottlenecks like infrastructural problems, problems with materials
supplies, etc; (iv) there are political or other risks of investment
in the foreign country; (v) the company has no permanent interest
in the foreign market concerned or that there is no guarantee of
the market available for a long period; (vi) foreign investment
is not favoured by the foreign country concerned; (vii) licensing
or contract manufacturing is not a better alternative.
- Licensing and Franchising:- are easy ways of entering the foreign markets. Under international
licensing, a firm in one country (the licensor) permits a firm in
another country (the licensee) to use its intellectual property
(such as patents, trade marks, copyrights, technology, technical
know-how, marketing skill or some other specific skill). The monetary
benefit to the licensor is the royalty or fees which the licensee
pays.
Franchising is a form of licensing in which a parent company (the
franchiser) grants another independent entity (the franchisee) the
right to do business in a prescribed manner. This right can take
the form of selling the franchiser's products, using its name, production
and marketing techniques, or general business approach. One of the
common forms of franchising involves the franchiser supplying an
important ingredient for the finished product, like the Coca Cola
supplying the syrup to the bottlers.
- Management Contracting:- is one in which the
supplier brings together a package of skills that will provide an
integrated service to the client without incurring the risk and
benefit of ownership. It enables a firm to commercialise existing
know-how that has been built up with significant investments and
frequently the impact of fluctuations in business volumes can be
reduced by making use of experienced personnel who otherwise would
have to be laid off. Under it the firm providing the management
know-how may not have any equity stake in the enterprise being managed.
- Turnkey Contracts:- are common in international
business in the supply,erection and commissioning of plants like
in the case of oil refineries, steel mills, cement and fertilizer
plants, etc. A turnkey operation is an agreement by the seller to
supply a buyer with a facility fully equipped and ready to be operated
by the buyer's personnel, who will be trained by the seller.
- Fully Owned Manufacturing Facilities:- Companies
with long term and substantial interest in the foreign market normally
establish wholly owned manufacturing facilities there. It provides
the firm with complete control over production and quality. It does
not have the risk of developing potential competitors as in the
case of licensing and contract manufacturing.
- Assembly Operations:- A manufacturer who wants
to take advantages that are associated with overseas manufacturing
facilities and yet does not want to go that far may establish overseas
assembly facilities in selected markets. It represents a cross between
exporting and overseas manufacturing. It is an ideal strategy when
there are economies of scale in the manufacture of parts and components
and when assembly operations are labour-intensive and labour is
cheap in the foreign country.
- Joint ventures:- is a very common strategy
of entering the foreign market. It represents a combination of subsets
of assets contributed by two (or more) business entities for a specific
business purpose and a limited duration. It generally has the following
characteristics:- (i) contribution by partners of money, property,
effort, knowledge, skill or other assets to the common undertaking;
(ii) joint property interest in the subject matter of the venture;
(iii) right of mutual control or management of the enterprise; (iv)
right to share in the property.
For more details visit our Section on 'Growing
Business'
- Mergers and Acquisitions:- have been a very
important market entry strategy as well as expansion strategy for
maximisation of a company's growth by enhancing its production and
marketing operations. They are being used in a wide array of fields
such as information technology, telecommunications, and business
process outsourcing as well as in traditional businesses in order
to gain strength, expand the customer base, cut competition or enter
into a new market or product segment.
For more details visit our Section on 'Growing
Business'
- Strategic Alliance:- has been becoming more
and more popular in international business. This strategy seeks
to enhance the long term competitive advantage of the firm by forming
alliance with its competitors, existing or potential in critical
areas, instead of competing with each other. It helps a company
to leverage critical capabilities, increase the flow of innovation
and increase flexibility in responding to market and technological
changes.
- Countertrade:- has been successfully used
by a number of companies as an entry strategy. It is a form of international
trade in which certain export and import transactions are directly
linked with each other and in which import of goods are paid for
by export of goods, instead of money payments. Its main attraction
is that it can give a firm a way to finance an export deal when
other means are not available. For example, Pepsico gained entry
to the USSR by employing this strategy.
- Decision regarding the nature of the organisational structure
of the company internationally.This will depend on number of factors
like:- Company's international orientation; nature of business; size
of business; its future plans,etc.
- Designing a suitable marketing mix- production,promotion,
price and physical distribution, so as to adopt to the characteristics
of overseas markets.
Hence, a firm typically passes through
different stages in its transition from local firm to a transnational
firm. That is, a firm which is entirely domestic in its activities normally
passes through different stages of internationalisation before it becomes
a truly global one. A firm may start exporting its products on an experimental
basis and if the results are satisfying, it would enlarge its international
operations and in due course it would establishes its offices,branches
or subsidiaries or joint ventures abroad. This expansionary process may
also be characterised by increasing the product mix and the number of
market segments and the number of countries of operation. Thus, the company
becomes multinational or global. In other words, for many firms overseas
business initially starts with a low degree of commitment and involvement,
and gradually develops into a global business organisation.
The examples of some of the business
opportunities abroad are:-
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