Business 101: Principles of Management

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When companies decide to do international business, they have a wide variety of methods they can use to actually enter the market. This lesson will discuss those different methods and analyze how they work in an international context

Entering an International Market

When you get up in the morning and go to work, you probably have several choices of which route you will take to go to work. There are probably several different roads or turns you could take that will get you there. Some of those routes might depend on whether you need to grab breakfast on the way in or drop off your kids at school. Just like you have different ways to go to work and there are different reasons for different routes, the same is true for different ways a company can go when thinking about entering an international market.

Imports and Exports

In its simplest form, international business is conducted by either importing products and services or exporting products and services. For example, a car manufacturer in Michigan might import tires from Mexico. In this same scenario, the company in Mexico is exporting tires to Michigan. They are shipping the product or service outside its borders to a foreign country. This is the most accepted and popular form of international business.

Licensing

In the case of licensing, a company is giving another company the right to make their product. Now, we all love soda, or at least I do. In a licensing situation, Coke (in the United States) would license, or allow, a foreign company to bottle their product. In this situation, they do not have a bottling plant overseas or make any investment. They simply enter into an agreement with a company overseas to do the bottling. They are giving their permission for that company to bottle the soda, and the foreign company pays a licensing fee to Coke for that opportunity.

Joint Venture

Take a look at your knee joint. You have the upper part of your leg and the bottom part, and the knee joint is what holds them together. This is very much like a joint venture. Two companies come together to work as one to produce a product or service. Each company brings something to the venture - maybe manufacturing or technical expertise - but in working together they produce a finished product and form a third company.

Wholly Owned Subsidiary

Not every company wants to, or has the opportunity to, work in any of the methods we've just discussed. Maybe the product is a pharmaceutical that they need to make sure they can control, or maybe the company makes a safety device that they cannot allow another form of international arrangement to be a part of. In this case, the company might use a wholly owned subsidiary. Thus, they own the foreign company, so they can make sure the quality is present.

Strategic Alliance

So, then, what's the difference between a joint venture and a strategic alliance? The difference here is that a strategic alliance is a short-term joint venture where neither company invests any money to form a third company. Typically, joint ventures are together longer than a strategic alliance. Basically, the two companies keep their identities and work together to make a product.

Summary

Which form a company will choose is totally up to the company or companies involved, the product that is being produced and how much involvement each company wants in the international business. As you can imagine, the more involvement or partnership, the more money that is spent and the closer the companies have to work together.