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III. DIFFERENT FORMS OF INTERNATIONAL BUSINESS ACTIVITY

Vocabulary and basic terms:

1. When a company globalizes, it tries to choose the best method to enter its overseas markets. Match the methods below with definitions.

1. Strategies for reaching global markets

An organization may participate in international trade in many ways, including exporting and importing, joint venturing, licensing creating subsidiaries, franchising, and countertrading.

Exporting

Because so many U.S. firms are reluctant to go through the trouble of establishing trading relationships overseas, it makes sense that some organization would step in to negotiate such exchanges for them. In fact, Congress authorized such organizations in 1982. They are called export-trading companies. A good place to get experience in international trade is at such an export house. Their function is to match buyers and sellers from different countries. Although the idea sounds great, the implementation of

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such trades has been less than expected. The Wall Street Journal reported that, “A principal problem of U.S. export trading companies is that they tend to lack experience and expertise.” International trade is so new to most U.S. firms that hardly anyone knows how to do it well.

Some companies handle exporting functions internally in the form of an export department or an export section in marketing. GE has 60 bilingual workers with MBAs (Masters of Business Administration) in its trading department, and 70 percent of them are foreign born. Students who learn foreign languages in school and enter international trade have an opportunity to improve the status of export college, firms such as GE Trading may be doing billions of dollars worth of foreign trade. The opportunities are there for those who prepare. Opportunities also exist for smaller entrepreneurs who are internationally oriented.

Licensing

A firm may decide to service a growing overseas market by licensing the manufacture of its product by a foreign producer on a royalty basis. The company sends representatives to the foreign producer to help set up the production process and may provide a variety of services such as marketing advice. A licensing agreement can be beneficial to a firm in several different ways. Through licensing, an organization can gain additional revenues from a product that it would not have normally generated domestically. In addition, foreign licensees often must purchase start-up supplies, component materials, and consulting services from the licensing firm. In some instances, these services extend beyond the start-up stage and become an ongoing source of additional revenue. Coke and Pepsi often enter foreign markets through licensing agreement that typically extend into long term service contracts. One final advantage of licensing worth noting is that licensors spend little or no money to produce and market the product. These costs come from the licensee’s pocket.

Therefore, licensees generally work very hard to see that the product succeeds in their market. The more sales - the more royalties. Unfortunately, licensing agreements may provide some disadvantages to a company. One major problem is that often a firm must grant licensing rights to its product for an extend period, maybe as long 20 years. If a product experiences remarkable growth in the foreign market, the bulk of the revenues go to the licensee. Perhaps even more threatening is the fact that a licensing firm is actually selling its expertise in a product area. If a foreign licensor learns the technology, it may break the agreement and begin to produce a similar product on its own. If legal remedies are not available, the licensing firm loses its trade secrets, not to mention the agreed upon royalties.

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Creating Subsidiaries

As the size of a foreign market expands, a firm may want to establish a foreign subsidiary. A foreign subsidiary is a company that is owned by another company (parent company) in a foreign country. Such a subsidiary would operate much like a domestic firm with production, distribution, promotion, pricing, and other business functions under the control of the foreign subsidiary’s management. Of course the legal requirements of both the home and host country would have to be observed. As you might suspect, the primary advantage of a subsidiary is that the company maintains complete control over any technology or expertise it may possess. Additionally, after tax obligations are paid, profits generated belong exclusively to the parent firm. The major shortcoming associated with creating a subsidiary is that the company is committing a large amount of funds and technology within foreign boundaries. Should relations with the host country falter, the firm’s assets could be taken over by the foreign government.

Franchising is a popular both domestically and in international markets. Firms such as McDonald’s, 7- Eleven, Ramada Inn, Avis, Hertz, Travelodge, and Dunkin’ Donuts have many overseas units operated by franchisees. For example, PepsiCo’s Kentucky

Fried Chicken has more than 2,700 units in 56 nations. In all, U.S. franchisers operated 31, 626 foreign outlets in 1986.

Franchisers have to be careful to adapt in the countries they serve. For example,

Kentucky Fried Chicken’s first 11 Hong Kong outlets failed within two years.

Apparently, the chicken was too greasy and messy to be eaten with fingers by entering the Amsterdam market. It originally set up operations in the suburbs, as it does in the United States, but soon learned that Europeans mostly live in the cities. Therefore, McDonald’s began to open outlets downtown. There are now thousands of franchises operating internationally. McDonald’s franchises now serve beer in Germany and wine in France. Other franchises are doing well also. Have you ever thought of opening a yogurt or ice cream franchise in one of the warm, exotic places where balmy breezes blow and life is relatively easy? The opportunities are there for the internationally minded businesspeople.

Joint Ventures

An international joint venture is a partnership in which companies from two different countries joint to undertake major project. News reports of such alliances have increased 47 percent annually in the past decade. A survey of affiliations by U.S.- based companies reported about 12,000 in which the American company owned a 10 – 50 percent equity position in a foreign firm. It is often hard to gain entry into a