by When a company decides to expand business beyond its home country, it must choose an appropriate method to enter the foreign market. This method is known as the mode of entry. The choice depends on factors such as investment capacity, risk tolerance, government regulations, competition, and business objectives. Some entry modes require low investment and risk, while others require large capital but offer greater control.
Modes of Entry in International Market
1. EXPORTING
Exporting is the most basic and widely used mode of entering international markets. Under this method, a firm produces goods in its home country and sells them to customers in foreign countries. The company does not establish production facilities abroad; instead, it uses distributors, agents, or international buyers to market its products. Exporting is generally considered the first step toward internationalization because it requires comparatively low investment and risk.
Types of Exporting
(a) Direct Exporting
In direct exporting, the producer directly sells goods to foreign buyers or appoints foreign agents and distributors. The firm itself manages marketing, promotion, pricing, and customer relationships in the overseas market.
This method provides greater control over brand image, customer feedback, and profit margins. However, it requires knowledge of foreign markets, export procedures, documentation, and transportation arrangements.
(b) Indirect Exporting
In indirect exporting, the company uses intermediaries such as export houses, trading companies, or export agents who handle all international marketing activities. The producer simply sells goods to these intermediaries, who then export them.
This method is suitable for small firms because it reduces risk and administrative burden. However, the company has limited control over foreign markets and earns comparatively lower profits.
Procedure of Exporting
The exporting process involves several steps:
Step 1. Receipt of Export Enquiry and Order
The exporting process begins when a foreign buyer sends an enquiry regarding price, quality, quantity, and delivery conditions. The exporter replies with a quotation. After negotiation, the buyer places a formal export order containing product specifications, payment terms, and shipment instructions. The exporter carefully examines and accepts the order.
Step 2. Obtaining Importer Exporter Code (IEC)
An exporter must obtain the Importer Exporter Code from the Directorate General of Foreign Trade (DGFT) in India. This registration number is mandatory for all export transactions. It enables the government to monitor foreign trade activities and allows exporters to legally conduct international business operations.
Step 3. Obtaining Export License
If the product falls under restricted or regulated categories, the exporter must obtain an export license from government authorities. Certain goods like defense equipment, rare minerals, or sensitive materials require special permission. For freely exportable goods, this step is not necessary.
Step 4. Arranging Pre-Shipment Finance
To fulfill the export order, the exporter needs working capital for purchasing raw materials, labour, packaging, and transportation. Banks provide pre-shipment finance or packing credit to exporters. This financial support helps them produce goods and prepare shipments before receiving payment from the importer.
Step 5. Production or Procurement of Goods
The exporter manufactures the goods or purchases them from suppliers according to buyer specifications. Quality, design, and packaging must strictly match the contract terms. Proper supervision and quality control are maintained to ensure international standards and customer satisfaction.
Step 6. Inspection and Quality Certification
Many importing countries require quality inspection by authorized agencies. The goods are examined to ensure they meet required standards. After verification, a certificate of inspection is issued. This assures the importer that the consignment is suitable and free from defects.
Step 7. Packing and Marking
Goods are packed using durable materials to protect them from damage during transportation. Special export packaging is used depending on sea or air shipment. Each package is properly labeled and marked with shipping details, handling instructions, and identification numbers.
Step 8. Booking Shipping Space
The exporter books space with a shipping line or airline through a clearing and forwarding agent. The shipping company issues a shipping order confirming cargo space and shipment schedule. This ensures that the goods will be transported to the destination country.
Step 9. Customs Clearance
The exporter prepares documents such as shipping bill, invoice, packing list, and export declaration and submits them to customs authorities. After examination and verification, customs officials grant permission for export and allow goods to leave the country.
Step 10. Shipment and Receipt of Payment
After clearance, goods are loaded on the ship or aircraft. The carrier issues a Bill of Lading or Airway Bill as proof of shipment. The exporter submits documents to the bank, which forwards them to the importer. Payment is received through banking channels, completing the export transaction.
Advantages of Exporting
- Low Investment: Exporting does not require establishing factories abroad, so capital investment is minimal.
- Low Risk: Since production remains in the home country, political and economic risks are comparatively lower.
- Market Expansion: Firms gain access to a larger international customer base, increasing sales and profits.
- Foreign Exchange Earnings: Exporting helps companies and countries earn valuable foreign currency.
- Utilization of Excess Capacity: Firms can use unused production capacity effectively by selling surplus goods abroad.
Disadvantages of Exporting
- Transportation Cost: Shipping and insurance charges increase overall cost of goods.
- Trade Barriers: Import duties, quotas, and regulations imposed by foreign governments may reduce competitiveness.
- Limited Control: When intermediaries are used, the firm has less control over pricing and marketing.
- Exchange Rate Risk: Fluctuations in foreign currency rates may affect profits.
- Longer Delivery Time: International shipping takes time and may cause delays in delivery.
2. LICENSING
Licensing is a contractual entry mode in which a company (licensor) grants permission to a foreign firm (licensee) to use its intellectual property rights such as patents, trademarks, copyrights, brand name, or production technology for a specified period. In return, the licensee pays royalty or fees to the licensor. The foreign company produces and sells goods in its domestic market using the licensor’s knowledge and brand.
Licensing requires low capital investment because the licensor does not establish manufacturing or marketing facilities abroad. It is especially useful when a country imposes strict import restrictions or when transportation costs are high. The local licensee has better knowledge of consumer preferences, language, and legal system, which helps in efficient operations.
Features of Licensing
- Contractual Agreement
Licensing is based on a formal legal contract between the licensor and the licensee. The agreement clearly defines rights, responsibilities, duration, territory, and royalty payment terms. It protects both parties from misunderstandings and legal disputes. The contract also specifies product standards, usage conditions, and termination clauses, ensuring that the business relationship operates in a systematic and legally secure manner.
- Transfer of Intellectual Property Rights
The main feature of licensing is the transfer of intellectual property rights. The licensor allows the licensee to use patents, trademarks, copyrights, brand name, technical know-how, or manufacturing processes. However, ownership of these rights remains with the licensor. The licensee only receives permission to use them for business purposes within agreed conditions and limitations mentioned in the licensing agreement.
- Royalty Payment
Under licensing, the licensee pays royalty or fees to the licensor for using its intellectual property. Royalty is usually calculated as a percentage of sales revenue or a fixed periodic payment. This provides continuous income to the licensor without direct involvement in production or marketing. The payment terms, frequency, and method are clearly stated in the agreement.
- No Direct Investment
Licensing does not require the licensor to invest in production facilities, machinery, or workforce in the foreign country. The licensee undertakes manufacturing and marketing activities using its own resources. Therefore, the licensor can expand internationally with minimal financial commitment. This makes licensing a suitable option for firms with limited capital but valuable technology or brand reputation.
- Limited Control
In licensing, operational control mainly lies with the licensee because it manages production, marketing, and distribution. The licensor only supervises quality standards and agreement compliance. As a result, the licensor has limited influence over day-to-day operations. This lack of full control may sometimes affect product quality or customer perception in foreign markets.
- Reduced Risk
Licensing reduces business risk for the licensor. Political instability, economic changes, and market fluctuations in the host country are largely borne by the licensee. Since the licensor does not make heavy investment abroad, financial losses are minimal. This makes licensing a safer entry mode compared to foreign direct investment.
- Local Production and Marketing
The licensee produces and sells goods in its own country using the licensor’s technology and brand name. Local production avoids import duties, transportation cost, and trade restrictions. The licensee also understands local consumer preferences, language, and distribution systems, which helps in effective marketing and wider acceptance of the product.
- Time-Bound Agreement
Licensing agreements are generally valid for a fixed period. After the specified duration, the agreement may be renewed or terminated based on mutual consent. Time limitation protects the licensor’s rights and allows review of performance. If the licensee fails to maintain standards or sales targets, the licensor can discontinue the agreement.
Process of Licensing
Licensing follows a systematic procedure through which a company allows a foreign firm to use its intellectual property rights in exchange for royalty. The process ensures legal protection, proper technology transfer, and smooth business operations between the licensor and the licensee.
Step 1. Identification of Potential Licensee
The first step is selecting a suitable foreign partner. The licensor studies foreign markets and identifies a reliable company capable of manufacturing and marketing the product. Factors such as financial strength, business reputation, technical capability, distribution network, and market experience are carefully evaluated. Choosing a competent licensee is very important because the success of licensing depends largely on the efficiency and credibility of the foreign partner.
Step 2. Preliminary Negotiation
After selecting the potential partner, both parties begin negotiations. They discuss the product, technology, brand usage, territory, duration, and expected sales performance. Financial matters such as royalty rate, payment method, and currency are also discussed. The aim of this stage is to reach mutual understanding and determine whether cooperation will be beneficial for both the licensor and licensee.
Step 3. Drafting the Licensing Agreement
Once terms are agreed upon, a formal legal contract is prepared. The licensing agreement clearly specifies rights and obligations of both parties. It includes duration of agreement, geographical area, royalty payment, confidentiality clause, quality standards, technical support, and termination conditions. This document protects intellectual property and prevents misuse. Legal experts usually assist in drafting to ensure compliance with international laws.
Step 4. Transfer of Technology and Know-how
After signing the agreement, the licensor transfers technical knowledge to the licensee. This may include production methods, designs, formulas, blueprints, and operational manuals. The licensor may also provide training to employees of the licensee. The objective is to enable the licensee to manufacture the product according to required standards and maintain consistent quality.
Step 5. Production and Marketing by Licensee
The licensee starts manufacturing goods using the licensor’s technology and brand name. It arranges raw materials, labor, and production facilities. The licensee also undertakes marketing, promotion, and distribution in its domestic market. Since the licensee understands local consumer preferences and business environment, it can effectively sell the product.
Step 6. Quality Control and Supervision
The licensor supervises the production process to ensure that quality standards are maintained. Periodic inspections, performance reports, and audits may be conducted. Maintaining quality is important to protect the brand image and reputation of the licensor in foreign markets.
Step 7. Payment of Royalty
The licensee pays royalty or fees to the licensor as agreed in the contract. The payment is generally a percentage of sales or a fixed periodic amount. Payments are usually made through banks in foreign currency. Regular payment ensures continuous benefit to the licensor without direct involvement in operations.
Step 8. Renewal or Termination of Agreement
At the end of the contract period, both parties review performance. If the business relationship is satisfactory, the agreement may be renewed. If terms are violated or performance is poor, the licensor may terminate the contract. This final step completes the licensing process.
Advantages of Licensing
- Low Investment Requirement
Licensing requires very little financial investment from the licensor. The foreign licensee establishes production facilities, hires labour, and manages operations. Therefore, the licensor can enter international markets without spending large capital. It is especially useful for small and medium-sized firms that cannot afford direct foreign investment.
- Reduced Business Risk
Since the licensee operates in the foreign country, the licensor faces limited business and political risk. If market demand declines or regulations change, the financial loss mainly affects the licensee. The licensor only provides technology, brand, or trademark and earns royalty income, making international expansion comparatively safer.
- Quick Market Entry
Licensing allows companies to enter foreign markets quickly. Instead of establishing factories and distribution networks, the licensor uses the existing facilities and market knowledge of the local firm. This saves time involved in approvals, construction, and recruitment. Hence, products can reach international consumers in a short period.
- Income through Royalties
The licensor earns continuous income in the form of royalties or fees without directly producing goods. Payments are usually calculated as a percentage of sales. Therefore, the licensor benefits from the foreign market’s success while avoiding operational responsibilities. It becomes a steady and regular source of foreign exchange earnings.
- Utilization of Local Expertise
The licensee understands local consumer preferences, language, culture, and legal requirements. This helps in better marketing, pricing, and distribution of products. As a result, the chances of success increase. The licensor benefits from local market knowledge without learning every detail about the foreign business environment.
- Avoidance of Trade Barriers
Many countries impose import restrictions, tariffs, and quotas. Licensing helps overcome these barriers because goods are produced locally by the licensee. Since products are manufactured within the host country, they are treated as domestic goods. Therefore, the firm can access protected markets without facing heavy duties or import limitations.
Disadvantages of Licensing
- Loss of Control
In licensing, the licensor does not have direct control over production and marketing activities. The licensee manages operations independently. If the licensee fails to maintain standards or follow guidelines, the licensor’s reputation may suffer. Limited supervision can reduce overall effectiveness in foreign markets.
- Risk of Creating Competitors
A major disadvantage is the possibility that the licensee may become a future competitor. After gaining technical knowledge and business experience, the licensee may start producing similar products independently. This can reduce the licensor’s market share and weaken its competitive advantage internationally.
- Limited Profit Potential
The licensor earns only royalty income, which is usually a small percentage of sales. Compared to direct investment or wholly owned subsidiaries, profits are limited. If the foreign market performs exceptionally well, the major share of profit goes to the licensee instead of the licensor.
- Quality Control Problems
Maintaining consistent product quality can be difficult. If the licensee uses inferior raw materials or fails to follow proper production methods, product quality may decline. Poor quality can damage the brand image and goodwill of the licensor in international markets.
- Possibility of Technology Misuse
Licensing involves sharing technical know-how and confidential information. There is always a risk that the licensee may misuse or leak proprietary knowledge. Weak intellectual property laws in some countries increase the risk of imitation and unauthorized production.
- Dependency on Licensee’s Performance
The success of licensing largely depends on the efficiency and commitment of the licensee. If the licensee lacks proper management skills, marketing ability, or financial stability, sales may suffer. The licensor has limited ability to directly improve performance, which can affect overall business growth.
3. FRANCHISING
Franchising is a specialized form of licensing in which a company (franchisor) allows a foreign business (franchisee) to operate a business using its brand name, trademark, and business system. The franchisor provides training, managerial support, marketing assistance, and standardized procedures. In return, the franchisee pays an initial franchise fee and periodic royalty.
Franchising is commonly used in service industries such as restaurants, hotels, education centers, and retail stores. It enables a company to expand rapidly across countries without investing large capital. The franchisee invests in infrastructure and manages daily operations according to the franchisor’s guidelines.
The major advantage is expansion with low risk. The franchisor maintains brand presence internationally while local entrepreneurs handle operations. Uniform quality standards and operating procedures ensure consistent customer experience worldwide. The franchisee benefits from operating a proven business model with recognized brand name and ongoing support.
However, franchising also has challenges. Maintaining consistent quality across different countries is difficult. Cultural differences may require product adaptation. Conflicts may arise regarding fees, territory rights, or management practices. The franchisee has limited independence as it must strictly follow franchisor policies.
Features of Franchising
- Use of Established Brand Name
Franchising allows the franchisee to operate under a well-known brand name and trademark of the franchisor. The recognized brand helps attract customers quickly and creates trust in the market. The franchisee benefits from the reputation and goodwill already developed by the franchisor in international markets.
- Standardized Business Operations
The franchisor provides a fixed method of operating the business. It includes store layout, product quality, pricing policies, service procedures, and employee behavior. The franchisee must strictly follow these standards to maintain uniformity worldwide. This ensures that customers receive the same experience in every country.
- Payment of Fees and Royalties
The franchisee pays an initial franchise fee to obtain business rights. Additionally, periodic royalty payments are made, usually based on sales revenue. These payments are the main income source for the franchisor. In return, the franchisee gets brand usage rights, training, and operational support.
- Training and Technical Support
The franchisor provides training programs to the franchisee and employees. Training includes production methods, customer service, accounting, and management practices. Continuous technical and managerial support is also offered. This guidance helps maintain efficiency and ensures that the business operates according to required standards.
- Continuous Supervision and Control
Franchisors regularly monitor the franchisee’s performance through inspections and reports. They ensure that the franchisee follows quality standards and operating procedures. This supervision protects brand image and customer satisfaction. The franchisee must follow rules and cannot make major changes without approval.
- Local Ownership and Investment
The franchisee invests capital and owns the local outlet. All expenses such as rent, staff salaries, and daily operations are managed by the franchisee. This reduces the financial burden on the franchisor while allowing expansion into foreign markets using local resources and knowledge.
- Marketing and Advertising Support
The franchisor often conducts national or global advertising campaigns. The franchisee benefits from these promotional activities without bearing full marketing costs. Advertising materials, brand logos, and marketing strategies are provided by the franchisor to maintain consistent promotion in international markets.
- Legal Agreement
Franchising operates under a formal written contract called a franchise agreement. The agreement specifies rights, obligations, duration, territory, and termination conditions. Both franchisor and franchisee must follow these legal terms. It helps prevent conflicts and ensures a clear business relationship between both parties.
Process of Franchising
Franchising follows a systematic procedure through which a franchisor grants business rights to a franchisee for operating in a particular market. The process ensures legal clarity, brand protection, and smooth business operations in international markets.
Step 1. Identification of Suitable Market
The franchisor first studies the foreign market to evaluate demand, competition, consumer preferences, and legal conditions. Market research helps the company decide whether franchising is suitable for that country. This step reduces risk and ensures that the business model can succeed in the selected market.
Step 2. Selection of Franchisee
After deciding the market, the franchisor selects a capable local partner. The franchisee is chosen based on financial strength, business experience, managerial ability, and reputation. A reliable partner is important because the franchisee will represent the brand and handle daily operations in the foreign country.
Step 3. Franchise Agreement
Both parties sign a formal legal contract called a franchise agreement. The agreement defines rights, responsibilities, territory, duration, fees, royalties, and operational rules. It also includes quality standards and termination conditions. This contract legally protects the brand name and prevents misunderstandings.
Step 4. Payment of Franchise Fee
The franchisee pays an initial franchise fee to obtain the right to operate the business. This payment grants permission to use the brand name, trademark, and business model. In addition to this fee, the franchisee agrees to pay periodic royalties based on sales revenue.
Step 5. Training and Setup
The franchisor provides training to the franchisee and staff. Training includes production methods, service procedures, accounting, and management practices. The franchisor also assists in selecting location, designing the outlet, purchasing equipment, and arranging supply systems to ensure uniform standards.
Step 6. Commencement of Business Operations
After completing setup and training, the franchise outlet starts operations. The franchisee manages daily activities such as sales, staffing, and customer service. The franchisor provides marketing support, advertising materials, and operational guidelines to ensure the business runs efficiently.
Step 7. Ongoing Supervision and Support
The franchisor regularly supervises performance through inspections, audits, and reports. Continuous support, technical assistance, and promotional activities are provided. The franchisee must maintain quality standards and follow rules. This step helps protect brand reputation and ensures long-term success of franchising operations.
4. JOINT VENTURE
A joint venture is an arrangement in which a foreign company collaborates with a local company to establish a new business enterprise in the host country. Both partners contribute capital, technology, expertise, and share profits and risks. This mode is commonly used where foreign ownership is restricted or where local knowledge is necessary.
Joint ventures offer several benefits. The foreign firm gains access to local market knowledge, distribution networks, and government relations. The domestic partner benefits from advanced technology, managerial skills, and financial resources. Sharing investment reduces financial burden and operational risk.
Features of Joint Venture
- Partnership between Two or More Firms
A joint venture involves cooperation between two or more independent companies, usually from different countries. Each partner agrees to work together for a common business objective. The firms remain legally separate but collaborate to form a new business entity for specific operations in international markets.
- Creation of a New Entity
In a joint venture, a separate legal organization is formed. The new company operates independently with its own name, management, and accounts. It is distinct from the parent companies. This entity conducts production, marketing, and distribution activities in the host country according to the agreement.
- Shared Ownership
Ownership of the joint venture company is shared among partners. Each partner holds a certain percentage of equity capital. Ownership may be equal or unequal depending on investment contribution. Profit distribution and voting rights are generally based on the ownership proportion decided in the agreement.
- Sharing of Risk and Profit
All partners share both business risks and profits. Financial losses, operational risks, and market uncertainties are divided according to ownership share. Similarly, profits earned by the venture are distributed among partners. This reduces the burden on a single firm and encourages cooperative effort.
- Contribution of Resources
Each partner contributes valuable resources such as capital, technology, technical expertise, marketing networks, and managerial skills. The foreign company usually provides advanced technology and brand reputation, while the local partner offers market knowledge, labour access, and familiarity with government regulations.
- Joint Management and Control
Management decisions are taken collectively by representatives of all partner firms. Both partners participate in planning, policy making, and operational control. This ensures mutual trust and balanced authority. Important business decisions require consultation and approval from all major stakeholders.
- Access to Local Market Knowledge
The local partner understands consumer preferences, culture, language, and business practices of the host country. This knowledge helps the joint venture adapt products and marketing strategies effectively. As a result, the foreign firm can operate smoothly without facing cultural or communication barriers.
- Limited Duration or Specific Purpose
Joint ventures are often formed for a specific project or limited period. After achieving the objective, partners may continue cooperation or dissolve the venture. The agreement clearly specifies duration, responsibilities, and exit procedures, ensuring flexibility and protection of interests for all participating firms.
Process of Joint Venture
A joint venture is established through a systematic procedure in which two or more firms from different countries agree to cooperate and form a new business enterprise. Each step is important to ensure legal clarity, smooth operations, and mutual benefit.
Step 1. Identification of Business Opportunity
The firms first identify a suitable international business opportunity. They analyze demand, competition, government policies, and economic conditions of the host country. This feasibility study helps both companies decide whether cooperation will be profitable and whether a joint venture is the appropriate entry strategy.
Step 2. Selection of Suitable Partner
The foreign company selects a reliable local partner. The partner is chosen based on financial capacity, business reputation, market knowledge, and managerial ability. A trustworthy partner is essential because both firms will share ownership, responsibilities, and risks in the new business.
Step 3. Negotiation and Agreement
Both firms discuss and negotiate terms and conditions. They decide capital contribution, ownership percentage, management structure, profit sharing, and operational responsibilities. After mutual understanding, they prepare a formal joint venture agreement defining rights, duties, and obligations of each partner.
Step 4. Government Approval and Legal Formalities
In many countries, government permission is required for foreign participation. The partners apply for approval, registration, and licensing according to local laws. Legal documentation ensures the venture is recognized as a separate business entity and can legally conduct operations.
Step 5. Formation of New Company
After approval, a new company is created. Shares are issued to partners according to their investment. The company receives its name, board of directors, and management team. It maintains separate accounts and operates independently from parent companies.
Step 6. Contribution of Capital and Resources
Each partner provides agreed resources such as money, technology, machinery, technical know-how, and managerial expertise. The foreign partner often contributes advanced technology, while the local partner provides labour, distribution channels, and knowledge of local market conditions.
Step 7. Commencement of Operations
The joint venture starts production and marketing activities. The company manufactures goods or provides services in the host country. Both partners supervise operations and coordinate business strategies to ensure efficiency and customer satisfaction.
Step 8. Monitoring and Performance Evaluation
Both partners regularly review performance through reports, audits, and meetings. They evaluate profits, sales growth, and operational efficiency. If problems arise, corrective actions are taken jointly. Continuous monitoring helps maintain cooperation and ensures long-term success of the joint venture.
5. STRATEGIC ALLIANCE
A strategic alliance is a cooperative agreement between firms from different countries to achieve specific objectives such as research, technology development, production, or marketing without forming a new company. Each firm remains legally independent but shares resources and expertise.
Strategic alliances allow companies to access advanced technology, knowledge, and distribution networks. They help reduce cost and risk by sharing investment. This entry mode is particularly useful in industries requiring innovation and high research expenditure such as information technology, aviation, and pharmaceuticals.
Features of Strategic Alliance
- Cooperation between Independent Firms
A strategic alliance involves collaboration between two or more independent companies from different countries. The firms work together to achieve specific business objectives such as technology development, marketing, or distribution. However, each company maintains its separate legal identity and continues its own core operations.
- No Creation of New Company
Unlike a joint venture, a strategic alliance does not usually create a separate legal entity. The participating firms sign an agreement and cooperate while remaining independent organizations. They coordinate certain activities but do not merge ownership or establish a new business enterprise.
- Sharing of Resources
Partner companies share selected resources such as technology, research facilities, managerial skills, production techniques, and distribution networks. Each firm contributes its strengths to the partnership. This pooling of resources improves efficiency and helps both companies expand internationally with reduced investment.
- Common Business Objective
Strategic alliances are formed for a particular goal such as entering a new market, developing a product, or conducting research. The cooperation continues until the objective is achieved. After completion, the firms may continue or terminate the alliance depending on mutual benefit.
- Limited Commitment
The level of commitment in a strategic alliance is limited compared to mergers or joint ventures. Companies cooperate only in specific areas rather than in all business activities. This flexibility allows firms to expand internationally without large financial investment or permanent obligations.
- Risk Sharing
Both partners share business risks associated with international operations. Market uncertainty, technological failure, and competition risks are divided among the participants. This reduces the burden on a single company and encourages firms to enter foreign markets confidently.
- Exchange of Knowledge and Technology
Strategic alliances promote transfer of knowledge, skills, and technology between firms. Companies learn new production methods, management practices, and marketing strategies from each other. This learning improves competitiveness and innovation in global business operations.
- Flexibility and Easy Exit
A strategic alliance is relatively flexible and easier to terminate compared to other forms of international business. The agreement specifies duration and exit conditions. If the alliance is no longer beneficial, firms can withdraw without major legal complications or financial losses.
Process of Strategic Alliance
A strategic alliance is formed through a planned sequence of steps in which two or more firms cooperate to achieve specific international business objectives while remaining legally independent. The process ensures mutual understanding, clear responsibilities, and effective coordination between partners.
Step 1. Identification of Business Need
A company first determines why it requires an alliance. The firm may need advanced technology, market access, distribution channels, or research support. Management evaluates internal strengths and weaknesses and decides that cooperation with another company is more beneficial than entering the foreign market alone.
Step 2. Search for Suitable Partner
The firm then searches for a compatible partner in the target country or industry. The partner is selected based on reputation, financial stability, expertise, and complementary capabilities. Compatibility in business culture, goals, and long-term vision is essential for the success of the alliance.
Step 3. Preliminary Discussions
Both firms meet and exchange information about their expectations and resources. They discuss objectives, areas of cooperation, and potential benefits. At this stage, confidentiality agreements may be signed to protect sensitive business information shared during negotiations.
Step 4. Negotiation of Terms
Detailed negotiations are conducted regarding roles, responsibilities, resource sharing, cost contribution, and profit sharing. The partners also decide the duration of cooperation, operational control, and performance standards. Clear negotiation helps avoid misunderstandings and future conflicts.
Step 5. Drafting the Alliance Agreement
After negotiations, a formal written agreement is prepared. The agreement specifies rights, duties, intellectual property protection, confidentiality, dispute settlement methods, and termination conditions. This legal document governs the relationship and provides protection to both companies.
Step 6. Implementation of the Alliance
Both firms begin cooperative activities such as joint research, marketing, production, or distribution. Each partner contributes agreed resources and coordinates operations. Teams are formed for communication and management to ensure effective cooperation and smooth functioning.
Step 7. Monitoring and Coordination
Regular meetings, progress reports, and performance reviews are conducted to monitor the alliance. Both partners evaluate whether objectives are being achieved. Any operational problems are discussed and corrected through mutual consultation and cooperation.
Step 8. Evaluation and Continuation or Exit
After a certain period, the partners evaluate results. If the alliance is successful, it may be extended or expanded. If objectives are not met or benefits decline, the firms may modify terms or terminate the agreement according to the exit conditions specified in the contract.
6. CONTRACT MANUFACTURING
Contract manufacturing is a mode in which a company hires a foreign manufacturer to produce goods according to its specifications and design. The firm markets and sells the product under its own brand name while the foreign company acts only as a producer.
This method reduces production cost because manufacturing takes place in countries with cheaper labor and raw materials. The company does not invest in building factories or employing workers abroad. It focuses on branding, marketing, and distribution while outsourcing production activities.
Features of Contract Manufacturing
- Production by Local Manufacturer
In contract manufacturing, a foreign company hires a local manufacturer in the host country to produce goods on its behalf. The local firm undertakes the manufacturing process, while the foreign company focuses on branding, marketing, and distribution. This arrangement helps reduce production costs.
- No Ownership of Production Facility
The foreign company does not establish its own factory in the host country. Instead, it uses the existing production facilities of the local manufacturer. This eliminates the need for heavy capital investment in land, building, and machinery while still allowing entry into international markets.
- Focus on Core Competencies
The international firm concentrates on its strengths such as research, product design, branding, and marketing. Manufacturing responsibilities are transferred to the contractor. This division of work improves efficiency and allows the company to utilize its resources in strategic business activities.
- Cost Advantage
Contract manufacturing helps companies reduce labour and production costs because manufacturing takes place in countries where wages and operating expenses are lower. The firm can produce goods at competitive prices and increase profitability while maintaining international presence.
- Quality Specifications by Buyer
The hiring company provides detailed instructions regarding product design, raw materials, and quality standards. The contract manufacturer must strictly follow these specifications. Regular inspections and monitoring are conducted to ensure products meet international quality and safety requirements.
- Branding and Marketing Control
Although production is done by the local manufacturer, the foreign company retains control over branding, packaging, and marketing. The final product is sold under the foreign company’s brand name. Therefore, customers associate the product with the international firm rather than the manufacturer.
- Legal Agreement
The relationship between the company and the manufacturer is governed by a formal contract. The agreement specifies production quantity, quality standards, price, delivery schedule, confidentiality, and duration. This contract protects business interests and prevents misuse of technology or designs.
- Easy Market Entry
Contract manufacturing allows quick entry into foreign markets. Since manufacturing facilities already exist, the company can start production immediately without waiting for construction or approvals. It is an effective entry strategy for firms with limited capital but strong marketing capability.
Process of Contract Manufacturing
Contract manufacturing follows a planned sequence through which a company gets its products manufactured by a foreign or local producer while retaining brand ownership and marketing control. Each step ensures quality production and smooth international business operations.
Step 1. Identification of Production Requirement
The company first determines the need for outsourcing manufacturing. It analyzes production cost, capacity limitations, and international demand. If producing goods domestically is expensive or difficult, the firm decides to appoint an external manufacturer in a foreign country to reduce cost and increase supply efficiency.
Step 2. Search for Suitable Manufacturer
The firm looks for a reliable manufacturer in the target country. Selection is based on technical capability, production capacity, experience, financial stability, and reputation. The company evaluates whether the manufacturer can meet quality standards and delivery schedules required for international markets.
Step 3. Negotiation of Terms
Both parties discuss important business conditions such as production quantity, price, delivery time, confidentiality, and quality requirements. Responsibilities for packaging, raw materials, and logistics are also decided. Proper negotiation helps establish a mutually beneficial and long-term relationship.
Step 4. Signing of Contract Agreement
A formal legal contract is prepared and signed. The agreement clearly defines production specifications, payment terms, intellectual property protection, duration, and penalties for non-performance. This document protects the company’s designs, brand name, and business interests.
Step 5. Transfer of Technical Specifications
The company provides detailed product design, production methods, raw material standards, and quality guidelines to the manufacturer. Training or technical assistance may also be given. This step ensures that the manufacturer understands the exact requirements and produces standardized products.
Step 6. Production and Quality Control
The manufacturer begins production according to the instructions. The hiring company conducts inspections and quality checks during and after production. Continuous monitoring ensures that goods meet international quality standards and customer expectations.
Step 7. Delivery and Distribution
After production, the finished goods are delivered to the company or directly to distributors and retailers. The hiring firm handles branding, packaging, advertising, and sales. The products are marketed under the company’s brand name in international markets.
Step 8. Evaluation and Continuation
The company reviews the manufacturer’s performance regarding quality, cost, and delivery reliability. If performance is satisfactory, the contract may be renewed or expanded. If not, the company may modify terms or select a different manufacturer for future production.
7. FOREIGN DIRECT INVESTMENT (FDI)
Foreign Direct Investment involves establishing business operations in a foreign country through subsidiaries, branches, or wholly owned companies. The firm invests capital and exercises full managerial control. It is the most comprehensive mode of international entry.
FDI provides maximum control over production, marketing, and quality standards. It eliminates transportation costs and import duties because goods are produced locally. Firms can adapt products according to local consumer preferences and develop long-term market presence.
Host countries benefit through employment generation, technology transfer, and economic development. Infrastructure and industrial growth also improve due to foreign investment.
Features of Foreign Direct Investment (FDI)
- Direct Ownership and Control
In Foreign Direct Investment, a foreign company invests capital directly in business operations of another country and gains ownership and managerial control. The investor participates in decision-making, production, and marketing activities rather than acting as a passive investor. Control over management distinguishes FDI from portfolio investment.
- Long-Term Investment
FDI is a long-term investment strategy. The investor establishes factories, offices, or subsidiaries and operates for many years. It is not short-term speculation. The objective is sustainable business growth, market expansion, and continuous profit generation in the host country.
- Transfer of Capital
The foreign investor brings financial resources into the host country. Capital is invested in building plants, purchasing machinery, infrastructure development, and business operations. This inflow of funds increases production capacity and contributes to economic development of the host nation.
- Transfer of Technology and Skills
FDI involves transfer of modern technology, production techniques, managerial skills, and professional expertise. Local employees receive training and gain technical knowledge. This improves productivity, efficiency, and industrial development in the host country.
- Establishment of Subsidiaries
The foreign company usually establishes a subsidiary, branch office, or joint venture enterprise in the host country. The new business unit operates under the parent company’s guidance and follows its business policies and quality standards.
- Active Participation in Management
Unlike other forms of international investment, the foreign investor actively manages operations. Managers from the parent company may supervise production, finance, marketing, and human resource activities to ensure efficiency and global standardization.
- Employment Generation
FDI creates employment opportunities in the host country. New factories, offices, and distribution networks require workers, technicians, and managers. As a result, unemployment decreases and income levels improve.
- Market Expansion
FDI helps companies enter foreign markets directly. By producing goods within the host country, the firm gains better access to customers and distribution networks. It also helps avoid import restrictions, tariffs, and transportation costs.
- Large Scale Operations
FDI generally involves large-scale production and significant investment. The investor builds infrastructure, establishes supply chains, and operates continuously. Therefore, it has a stronger economic impact compared to exporting or licensing.
- Government Regulation
Foreign Direct Investment is subject to host country laws, regulations, and approval procedures. Governments may impose restrictions, ownership limits, or performance requirements. Compliance with legal and regulatory frameworks is necessary for successful operation.
Process of Foreign Direct Investment (FDI)
Foreign Direct Investment follows a systematic procedure through which a company establishes ownership and control over business operations in a foreign country. The process ensures legal compliance, proper planning, and long-term success.
Step 1. Identification of Investment Opportunity
The company first identifies a suitable foreign market for investment. It studies demand conditions, competition, political stability, economic growth, labour availability, and government policies. Market research helps determine whether establishing a subsidiary, branch, or joint venture will be profitable.
Step 2. Feasibility Analysis
After selecting the country, the firm conducts a detailed feasibility study. It evaluates expected costs, revenue potential, risk factors, taxation policies, and legal requirements. Financial projections and risk assessments are prepared to ensure that the investment will generate adequate returns.
Step 3. Selection of Entry Mode
The investor decides the form of FDI. It may establish a wholly owned subsidiary, acquire an existing company, or form a joint venture with a local firm. The choice depends on ownership preference, government regulations, and level of control required.
Step 4. Government Approval and Legal Compliance
Many countries require official permission for foreign investment. The company submits applications, business plans, and necessary documents to regulatory authorities. After approval, it completes registration procedures and complies with taxation, labour, and environmental laws.
Step 5. Arrangement of Capital
The investor arranges financial resources for the project. Funds may be transferred from the parent company or raised through international financing. Capital is allocated for land, building, machinery, technology, and working capital requirements.
Step 6. Establishment of Business Entity
The company sets up the new enterprise in the host country. It may construct production facilities, open offices, or acquire an existing business. A management team is appointed to supervise operations and ensure smooth functioning.
Step 7. Recruitment and Training
Employees are recruited locally to operate the business. The parent company may also send experienced managers to oversee activities. Training programs are conducted to transfer technology, managerial practices, and quality standards to local staff.
Step 8. Commencement of Operations
After completing setup and staffing, production and marketing activities begin. The company manufactures goods or provides services in the host country. Regular monitoring and performance evaluation ensure that objectives are achieved and profitability is maintained.
8. TURNKEY PROJECTS
Turnkey projects involve designing, constructing, and setting up a complete industrial or infrastructure project in a foreign country and handing it over to the client ready for operation. The contractor provides equipment, technology, and training.
This entry mode is common in power plants, oil refineries, and construction projects. It is particularly useful for countries lacking technical expertise.
The contractor earns revenue without long-term operational responsibility. The host country receives a fully operational facility and modern technology.
Features of Turnkey Projects
- Ready-to-Operate Facility
In a turnkey project, the foreign company designs, constructs, installs equipment, and makes the plant fully operational. The project is handed over to the client only after completion. The buyer simply “turns the key” and starts operations without undertaking construction or installation work.
- Single Contractor Responsibility
The entire project is handled by one contractor or company. The contractor is responsible for planning, engineering, procurement, construction, installation, and testing. Since a single firm manages all activities, coordination problems are minimized and accountability becomes clear.
- Transfer of Technical Knowledge
The contractor provides technical know-how, production methods, and operational training to the client’s employees. The local workforce learns how to operate and maintain the plant. This helps the host country acquire advanced technology and improve industrial capability.
- Fixed Contract Price
Turnkey projects are usually executed at a predetermined price agreed upon in the contract. The total cost of design, construction, and installation is decided beforehand. This protects the client from unexpected expenses and ensures financial certainty during project implementation.
- Limited Operational Involvement
After completing the project and handing it over, the contractor has no long-term involvement in daily business operations. The buyer assumes full ownership and management control. The contractor’s responsibility ends once the facility is ready for use and training is completed.
- Suitable for Complex Industries
Turnkey projects are commonly used in industries requiring high technical expertise such as oil refineries, power plants, chemical factories, and infrastructure development. These sectors require specialized knowledge and advanced engineering that the host country may initially lack.
- Time-Bound Completion
The project must be completed within a specified time period mentioned in the agreement. The contractor follows a strict schedule for design, construction, and installation. Timely completion is important because delays may lead to penalties or financial loss.
- Minimal Risk for Client
Since the contractor handles all stages of the project, the client bears very little construction and technical risk. The responsibility for design errors, construction issues, and installation problems lies with the contractor. The buyer receives a functioning facility with reduced uncertainty.
Process of Turnkey Projects
A turnkey project follows a systematic procedure in which a contractor undertakes complete responsibility for designing, constructing, and making a project fully operational before handing it over to the client. The process ensures efficiency, clarity of responsibility, and successful completion.
Step 1. Identification of Project Requirement
The client (usually a government or large company) identifies the need for establishing a plant, refinery, power station, or industrial unit. Since such projects require advanced technical expertise, the client decides to appoint a foreign contractor capable of handling the entire project.
Step 2. Invitation of Tenders
The client invites tenders or proposals from qualified international contractors. Interested firms submit technical and financial proposals describing project design, estimated cost, time schedule, and implementation plan. The client evaluates these proposals carefully before selecting the most suitable contractor.
Step 3. Negotiation and Contract Agreement
After selecting the contractor, both parties negotiate terms such as total cost, completion time, quality standards, payment schedule, and penalties for delay. A formal turnkey contract is signed specifying responsibilities, technical specifications, and performance guarantees.
Step 4. Project Design and Planning
The contractor prepares detailed engineering designs, layout plans, and technical blueprints. Procurement of machinery, equipment, and raw materials is arranged. A project schedule is created to ensure timely execution of construction and installation activities.
Step 5. Construction and Installation
The contractor begins construction of buildings, installation of machinery, and setup of production systems. Skilled engineers and technicians supervise all activities. The contractor ensures that work follows safety standards and technical requirements mentioned in the agreement.
Step 6. Testing and Trial Production
After construction and installation, the plant undergoes testing and trial production. The contractor checks whether machinery functions properly and production standards are achieved. Necessary adjustments are made to ensure smooth and efficient operations before final handover.
Step 7. Training of Personnel
The contractor provides training to the client’s employees regarding operation, maintenance, and management of the facility. This ensures that the local workforce can independently manage the plant after takeover.
Step 8. Final Handover
Once the project is fully operational and performance standards are met, the contractor hands over the completed facility to the client. Ownership and operational control are transferred, and the contractor’s responsibility ends as per the contract terms.
