When pursuing international business, an organization must decide on one of the suitable modes of operation ranging from importing/exporting to direct and portfolio investment. Firms entering a foreign market are at a disadvantage due to their less or lack of knowledge of the local market in comparison to the indigenous companies. This requires the need for foreign firms to have a compensating advantage in order to successfully compete in the local market. This advantage may include proprietary technology, preferential access to capital, superior marketing skills, absolute cost advantages, economies of scale or product differentiation.

Merchandise Export and Import

Exporting and importing are the most popular modes of international business, especially among small companies. Merchandise exports are tangible products that are sent out of a country; merchandise imports are good brought into a country. They are also known as visible exports and imports because they can actually be seen. For example when an Indonesian manufacturing plant sends athletic shoes to the United Arab Emirates, the shoes are exports from Indonesia and imports for the United Arab Emirates. Import and exports are major sources of international revenue and expenditure. 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 and the Government.

 

Firms exporting to foreign markets are at a disadvantage due to distance from the market which makes it hard for them to monitor and the doubts in the minds of consumers in the local that the firm is unable to deliver on time with appropriate service and backup. In this case a local agent or distributor can act as surrogate presence in the market (e.g. Spear Motors). Still consumers will opt for local organizations since they can equally satisfy the needs. Hence the need for a compensating advantage that will create a perceived advantage in purchasing the need for a foreign alternative.

 

Service exports and Imports

Though the term export and import apply often to merchandise service import and exports refer to products that generate non-product international earnings. The company or individual that provides the services and receive payments makes a service export; The company or individual that receives and pays for it makes a service import. Currently services account for the fastest growing sector in international trade and they take many forms such as follows:

 

Tourism and transportation – obviously tourism and transportation are important sources of revenue for airlines, shipping companies, travel agencies and hotels. For example let’s say Mr. Osunsan takes British Airways from Nigeria to attend a conference in the UK. His air ticket on British airways and travel expenses in England are service exports for England and service imports for Nigeria. The economies in some countries depends heavily on revenues from service exports countries such as Greece and the Bahamas where a significant amount of employment and foreign exchange earnings comes through cargo carried on ships by domestically owned shipping lines and cruise line services respectively.

 

Service performance

Some services including banking, insurance, rental, engineering and management services accumulate as net company earnings in the form of fees which are payments for the performance of those services. At an international level companies may pay fees for engineering services rendered called turnkey operations which often are construction projects performed under contract and transferred to owners when they are operational. For example Bechtel a global engineering, construction and project Management Company currently has turnkey contracts to rebuild facilities in Afghanistan. Companies also pay fees form management contracts which are arrangements in which one company provides personnel to perform general or specialized management functions for another. For example Disney receives such fees from managing theme parks in France and Japan; the same is true with Enhas managing Entebbe International airport.

 

Asset Use

When one company allows another to use its assets such as trademarks, patents, copyrights, or expertise under contracts known as licensing agreements, they receive earnings called royalties. For example in the international setting sport teams license foreign companies to print their logos on shirts, cups and other merchandise. 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. Royalties also come from franchise contracts where one company (the franchisor) allows another (the franchisee) to use a trademark as an essential asset in the franchisee’s business. The franchisor also assists continuously in the operation of the franchisee’s business by providing supplies, management services or technology. Examples of franchisors include McDonald’s, Steers and Nando’s. Firms undertaking licensing and other contractual arrangements avoid the problem of ‘foreignness’, since local firms act as representatives in the local market. As the products are produced locally, consumers may be unaware of the fact that the technology and brand belong to a foreign firm. The problem is that there is the possibility the firm’s comparative advantage will be eroded through the transfer and ultimately used against it by the local firm upon the termination of the arrangement. This is possible because throughout the period the firm will be imparting knowledge and expertise to the local firm. Patents and trademarks can offer a degree of protection, in other cases the components are provided to the licensee or joint venture partner and not the process of developing it. Some anti-trust authorities disagree with this approach since they see it as being anti-competitive. In the case of licensing and other contractual agreements, the key management decision is not such as returns of the short-term, but the longterm implication of technology transfer. If the firms compensating advantage is its proprietary technology, it is advisable to avoid sharing technological information (E.g. Coke and its formula).

 

Investments

Foreign investment means ownership of foreign property in exchange for a financial return such as interests and dividends which are considered to be service exports and imports because they represent the use of assets (capital). The investment themselves however are treated as a different form of service exports and imports. Foreign investment takes two forms: direct and portfolio.

 

Direct investment – famously known as foreign direct investment (FDI) is when the investor takes controlling interest in a foreign company. The control need not be 100% (or even 50%). What matters is that no other owner may be able to counter the decisions of the foreign investor. An example is when Nintendo bought Seattle Mariners, a baseball team, which was considered to be a Japanese FDI in the USA. 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.

 

When two or more companies can share ownership of a FDI, the operation is a 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. Foreign direct investment gives the firm the ability to create a local identity and compete on a more equal level with local firms. In fact most of the long-established multinationals in global markets have carved out a global rather than a country of origin persona which has given them complete acceptability in foreign markets (e.g. Unilever). Government procurement is vital when it comes to foreign direct investment, since in some industry the government is the major purchaser of the goods and service (e.g. Defense and Pharmaceuticals). There is the tendency for governments to buy goods from local firms to the exclusion of foreign firms, regardless of price and quality differentials due the benefits of lower transport and trading costs, better after-sales service and quicker delivery. Additionally the government will be supporting employment, assisting ailing industries, bolstering emerging sectors and ensuring profits are earned locally. Firms operating in these industries have little choice but to locate their activities in the target market or lose out.

 

Portfolio Investment – is a non-controlling interest in a company or ownership of a loan made to another party. These investments normally take one of two forms: stock in a company or loan to a company (or country) in form of bonds, bills, or notes purchased by the investor. They are important investments for companies with extensive international operations, with exception to stocks they are mainly short term financial gain. To earn higher yields on short term investments, companies routinely move funds from country to country.