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Question

Discuss briefly the factors that govern the choice of mode of entry into international business.


Solution

The following factors govern the choice of mode of entry into international business

(i) Ease of Entry: Some modes of entry into an international business like exporting involve lesser formalities than others such as going for joint ventures, franchising or wholly owned subsidiaries. Thus, initially exporting is the mode generally adopted for entry into international markets.

(ii) Associated Risk: Risk of international exposure is higher in joint ventures and wholly-owned subsidiaries as more investment is involved and socio-economic conditions of the host country along with political and regulatory concerns become more important. Therefore, some other mode like licensing or contract manufacturing might be chosen to reduce risk.

(iii) Efforts Involved: Time and effort one needs to put in is another factor which determines the mode of international business. Modes like exporting, licensing and franchising involve lesser effort than a joint venture or wholly owned subsidiary.

(iv) Degree of Control: If a firm wants to exercise full control over the operations in foreign countries, it goes for wholly owned subsidiary. Similarly, degree of control is higher in franchising as compared to licensing and so on.

(v) Nature of Business: If the business requires the firm to be in close contact with the customers in the foreign markets, wholly owned subsidiary or joint venture is more suitable while if the products can be supplied from a distance, modes like exporting can suffice. The nature of products being manufactured and the availability of raw material also determine the mode of entry into the international business.


Business Studies

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