Describe the three categories of internationalization strategies, and
explain why it is more difficult and risky to internationalize through FDI than
through franchising. Provide examples of firms that have done each, as well as
their motivations for internationalizing.
Chapter 14
Exporting and Countertrade
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#Exporting #Countertrade #Chapter14
International Business: The New Realities, Global
Edition, 3e (Cavusgil)
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Exporting, Countertrade, Chapter14
Answer: Three categories of internationalization strategies are as follows:
ReplyDelete1. Trade of products and services are generally home-based international exchange activities, such as global sourcing, exporting, and countertrade. Global sourcing, also known as importing, global procurement, or global purchasing, is the strategy of buying products and services from foreign sources and bringing them into the home country or a third country. While sourcing and importing represent an inbound flow, exporting represents outbound international business. Thus, exporting refers to the strategy of producing products or services in one country (often the producer's home country) and selling and distributing them to customers located in other countries. In both global sourcing and exporting, the firm manages its international operations largely from the home country. Countertrade refers to an international business transaction in which full or partial payments are made in kind rather than cash. That is, instead of receiving money as payment for exported products, the firm receives other products or commodities.
2. Equity or ownership-based international business activities typically are foreign direct investment (FDI) and equity-based collaborative ventures. In contrast to home-based international operations, here the firm establishes a presence in the foreign market by investing capital in and securing ownership of a factory, subsidiary, or other facility there. Collaborative ventures include joint ventures in which the firm makes similar equity investments abroad, but in partnership with another company.
3. Contractual relationships usually take the form of licensing and franchising, in which the firm allows a foreign partner to use its intellectual property in return for royalties or other compensation. Firms such as McDonalds, Dunkin Donuts, and Century 21 Real Estate use franchising to serve customers abroad.
For companies that launch exporting, licensing, or franchising ventures, internationalization motives tend to be relatively straightforward. In most cases, management seeks to maximize returns from investments that the firm has made in products, services, and know-how by seeking a broader customer base located abroad. When such firms as Intel (computer technology) and Subway (restaurants) internationalize, they are essentially exploiting their competitive assets in a broader geographic space.
In contrast, FDI and collaborative ventures usually involve more complex motivations. They pose greater risks for managers, and require careful consideration of the likely costs and benefits of internationalization. For example, the Swedish appliance maker Electrolux recently built assembly operations in such diverse markets as Hungary, Mexico, and Thailand. Home appliances represent a complex global industry in which profit margins are tight and competition is intense. By undertaking product development, manufacturing, supply-chain coordination, and workforce management in relatively risky markets, Electrolux has taken on formidable challenges.