Question

Answer the following questions.

Discuss briefly the factors that govern the choice of entry into International Business.

Answer 1

International business is basically concerned with trade of goods and services across national boundaries. In order to enter the international arena, firms have various modes open to them. The following are the different factors governing the choice of modes of entry to international business:

i. Complexity - Complexity is a major factor governing the choice of the mode to enter international business. The level of complexity differs among the different modes. For instance, the degree of complexity in setting up a wholly-owned subsidiary abroad is higher than that in starting an export and import business. Thus, for businesses that want to avoid complexities in their operations, starting an export and import business is a better option.

ii. Risks involved - The different modes of entry to international business involve different levels of risks. For instance, the risk involved in contract manufacturing, exporting and licensing are comparatively negligible. On the other hand, the risk is comparatively higher in setting up a wholly-owned subsidiary for entering international trade. Thus, generally, modes with lower risks are preferred by companies.

iii. Ownership and control - Some entrepreneurs prefer to have full ownership and decision-making control over the foreign firms involved in their international business. A wholly -owned subsidiary gives full decision-making control to the parent company over its foreign subsidiary. On the other hand, modes of entry into international business, such as licensing and exporting, do not offer ownership rights to the parent company.

iv. Investment - Every mode of entry does not require the same amount of investment. For instance, the level of investment required for setting up a wholly-owned subsidiary is higher than engagement in import and export business or for licensing a foreign company. Thus, the mode of entry preferred by a firm depends on its capacity and readiness to make an investment.