operates the business under the name of another company called the franchisor ○ Under this agreement the franchisee pays a fee to the franchisor. ○ The franchisor provides the right to use trademarks, operating system, product reputation and continuous support system like advertising, employee training etc. ADVANTAGES ❏ Greater degree of control compared to licensing ❏ Low-risk, low cost entry mode ❏ Using highly motivated business contacts with money, local market knowledge and experience ❏ Quick development of international market s ❏ Generating economies of scale ❏ Precursor to possible future FDI in foreign markets DISADVANTAGES ❏ Search for a competent franchisee is expensive and time- consuming ❏ Costs of creating and marketing a unique package of products recognized internationally ❏ Costs of protecting goodwill and brand name ❏ Problems with local legislation ❏ Opening internal business knowledge may create future competitor ❏ Lack of control ❏ Risk to the company’s international profile and reputation CONTRACT MANUFACTURING ● outsourcing entire or part of manufacturing operations. ○ Apple products are manufactured in China by Foxconn. ○ Hence, Foxconn is a contract manufacturer and Apple benefits from a lower cost of manufacturing devices ADVANTAGES ❏ Low risk market entry ❏ No local investment with no risk of exploration ❏ Control over R&D, marketing and sales service ❏ Avoids financial problems ❏ Locally made image ❏ Entry into markets protected by tariffs or barriers ❏ Cost advantage ❏ Avoids transfer-pricing problems DISADVANTAGES ❏ Transfer of production know-how is difficult ❏ Hard to find reliable manufacturer ❏ Extensive technical training of local manufacturer ❏ The subcontractor could become a competitor ❏ Control over manufacturing quality is difficult ❏ Possible supply limitations JOINT VENTURE ● Two or more firm join together to create a new business entity that is legally separate and distinct from its parents. It involves shared ownership. ● It provides strength in terms of required capital, latest technology required human talent etc. and enable the companies to share the risk in the foreign markets. This act improves the local image in the host country and also satisfies the governmental joint venture.
LISA YANG IBUS20002 Business in the Global Economy ADVANTAGES ❏ Access to expertise and contacts in local markets ❏ Reduced market and political risk ❏ Shared knowledge and resources ❏ Economies of scale ❏ Shared risk of failure ❏ Less costly than acquisitions ❏ Better relations with national government ⇒ reduced political risk DISADVANTAGES ❏ Large investments of resources ❏ Partners may be locked into long term relations ❏ Transfer pricing problems ❏ The importance of venture to each partner may change over time ❏ Cultural differences may result in management differences ❏ Loss of flexibility and confidentiality ❏ Problems of management structures and dual parenting MERGER AND ACQUISITION ● A domestic company selects a foreign company and merger itself with foreign company in order to enter international business.
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- Marketing, LISA YANG