Globalisation – Meaning,

Advantages and Impact

Dr. Vivek Singh
 Globalisation

Integration of a nation’s economy with the global

economy
Free movement of goods, services and people
across the world
Globalization is grounded in the theory of
comparative advantage
Countries of the world subscribe to the rules and
procedures of the WTO
 Globalisation..

Result of the opening up of the global economy and

the concomitant increase in trade between nations.

Outcome of the policies of liberalisation and

privatisation.

Transforming the world towards a greater

interdependence and integration.
Growing Advantages of Globalisation

Greater access to global markets

• Access to 100s of other countries markets
• Investment and technology access
• Access to global resources
• Less dependency on domestic market

Growth of Economy
• Increase in Size of GDP
• Per capita income

Increase in employment opportunities

• Through MNCs
• Through excess capacity Utilisation
• Expansion
Growing Advantages of Globalisation

Increase in compensation
• Compensation of foreign firms operating in India
• Higher profit --- Higher compensation

High standard of living

• Better employment opportunities
• Quality goods and services
• Increased compensation
• More expenditure, western culture influence

Access to labour
• Outsourcing
Growing Advantages of Globalisation

Access to Untapped markets

• various undiscovered business sectors with tremendous
potential

Increased Global Cooperation

• Increased global cooperation
• More bilateral and multilateral trade agreements
Growing Advantages of Globalisation

Increased Cross-Border Investment

• FDI
• FPI

Better services
• Improvement in quality of service
• 3 way competition
Globalisation – Impact
(Positive & Negative)
Negative impact of Globalisation

Global
Warming
• Globalization has led to increased
production to meet global demand.
Green Houses
Deforestation
Gases
• Increased production means more
Causes usage of natural resources leading to a
Environmental negative impact on the environment.
Damage
• Developing countries rules and Climate
Pollution
regulations on environmental Change
protection are not as strict as in
developed countries.
Negative impact of Globalisation

Capital and profit outflow

Difficult to survive – Small and Financially

Job Insecurity weak companies

• Globalization takes jobs from one Disproportionate Growth

country and provides them to
another. Threat to the world's cultural diversity
& Traditions – (Western Culture)

• More job opportunities in developing Governments feel that they are losing
countries due to less labour costs control over key decisions

•Migration of people across the world -

• fewer job opportunities in developed conflict of ideologies.
countries Operates mostly in the interests of the
developed countries
Global Risks Report 2024 – Class Discussion and
Analysis

[Link]
 Positive impact of Globalisation

MNCs provide
Access to a MNCs bring Increased
new jobs and
Larger Markets foreign capital Competition
Upgrade skills.

Quality Goods Promotes

Promotes
to Consumers World
Specialisation
with Options Peace and Unity
Types of International Strategies
 Basic strategies for International market
(Types of International Strategies)

A firm that has operations in more than one

country is known as a MNC • Microsoft $3.35 Trillion
Size of a MNC may be higher than GDP of a • Amazone $2 Trillion
country

There are four main international strategies

available to serve in international markets -
• International
• Multi-domestic
• Global
• Transnational
 Each strategy involves a different
approach with relation to
• (1) cost
• (2) Local responsiveness

• Cost Pressure / Global integration

• Try to Reduce cost as much as

possible
• by economies of scale and
standardized product offering
worldwide.

Local responsiveness

Adapt products and services to

specific local needs.
 International Strategy
Low Cost Pressure Low Local responsiveness

• Firms pursuing international strategy are neither

concerned about costs nor adapting to the local
cultural conditions.

• They attempt to sell their products internationally with

little to no change.

• When Harley Davidson sells motorcycles abroad, they

do not need to lower their prices or adapt the bike to
local motorcycle standards.

• People in other countries buy a Harley particularly

because it is different from the local motorcycles

• Rolex watches
 Multi-Domestic Strategy
Low Cost Pressure High Local
responsiveness
• A firm using a multi-domestic strategy does not
focus on cost or efficiency but emphasizes
responsiveness to local requirements

• Netflix customizes the programming that is shown

on its channels within dozens of countries,
including New Zealand, Pakistan, and India.
Global Strategy
High Cost Pressure Low Local
responsiveness
• A firm using a global strategy sacrifices responsiveness to local
requirements within each of its markets in favor of emphasizing
lower costs and better efficiency.

• This strategy is the complete opposite of a multi-domestic

strategy.

• Some minor modifications to products and services may be made

in various markets, but a global strategy stresses the need to gain
low costs and economies of scale

• Microsoft, for example, offers the same software programs

around the world but adjusts the programs to match local
languages.

• Chip maker Intel, Lenovo

Transnational Strategy
High Cost Pressure High Local response

• A firm using a transnational strategy seeks a middle

ground between a multi-domestic strategy and a
global strategy.

• Such a firm tries to balance the desire for lower costs

and efficiency with the need to adjust to local
preferences within various countries.

• KFC & McDonald’s rely on the same brand names and

the same core menu items around the world.

• These firms also give importance to local tastes too.

• Link
 Reason for a firm to go global

Increase Gain a Potential for Access to

revenue competitive Higher Profits Larger Markets
potential advantage and sales and resources

Build your Balance out Diversification

brand seasonal of Risks
presence and fluctuations
grow your
footprint
Reason for a firm to go global
• #1 Increase revenue potential
• The world's largest companies are global. International expansion offers the chance to explore new emerging markets, expand the customer base and
thus, increase revenue potential.
• Cross-border e-commerce is rapidly becoming the new norm. The rise of the platform economy has made it easier for big or small brands to sell
directly to the customer without a traditional storefront.
• The internet economy is expected to triple in size to $300 billion in Southeast Asia by 2025. Lazada, Southeast Asia's e-commerce owned by Alibaba,
recorded over 90% year-over-year order growth for the 2021 Q1 quarter. Even with lockdowns lifted in some countries, many shoppers continue to
shop online.
• #2 Diversify your supply chain to overcome disruptions
• The supply chain shock that first started during COVID19 has exposed vulnerabilities in the production strategies of many businesses.
• According to an April 2020 survey by the Institute of Supply Management ISM, 95 per cent of US organisations experienced supply chain disruptions
across their supply chain due to the COVID19 pandemic. China reported a 222 per cent uptick in the average time for materials to be delivered. Korea
followed closely behind at 217 per cent. As companies can no longer rely on a small group of suppliers, diversifying the pool ensures resilience in case
of a similar global shock.
• For example, manufacturing multinationals, such as Infineon technologies and Micron, base their regional and global supply chains out of
Singapore. These businesses leverage Singapore's global network of logistics multinationals to build resilience in their supply chain. At the same time,
they can cater to regional customers with speedy fulfilment and faster response time.
• #3 Build your brand presence and grow your footprint
• Social media has eased brand recognition across borders.
• MINISO is a Japanese-inspired Chinese retail brand, which first emerged in 2009 and had over 4,587 stores worldwide in 2020. By focusing on
low-cost aesthetic items, it was able to transcend cultural barriers and target value-conscious customers in over 70 countries.
• The main challenge MINISO faced was to target a market that existed across diverse countries. By partnering with brand ambassadors that are
recognisable in their target markets, MINISO was able to increase social media interaction by 300 percent and boost online and offline sales in the
middle of a pandemic.
• Building an international brand presence can also act as a strategic boost for businesses, allowing them to overcome dependency on domestic
markets while effectively addressing their overall market position.
Reason for a firm to go global
• #4 Gain a competitive advantage
• A competitive advantage can distinguish a company from its competitors and build stronger brand loyalty.
• Thailand, for instance, is actively promoting technology-driven innovation.
• In the first nine months of 2020, Thailand's electronics and electrical E&E) industry has attracted 106 new investments, rising
from 94 projects in 2019. Companies with an appetite for innovation can benefit from the privileges offered by the Thai
government to grow their innovation arm. Firms spending more than one per cent of total sales on research and development
R&D) in the first three years will be eligible for corporate income tax exemption for up to five years.
• For more information about business expansion into Thailand, please download our guide.

• #5 Balance out seasonal fluctuations

• Foreign markets can counter dips in demand in your home market. Going global allows companies to tap into additional
revenue streams and normalise the production peaks and troughs to meet varying seasonal demand in different markets.
• While going global brings attractive market diversification and expanding market share, there is an added layer of complexity
with new regulations, administrative requirements, and overhead costs.
• There are many reasons why companies may look to go global. To do it successfully, however, it requires strategic planning,
time, resources and on the ground partners.
• Hawksford, can provide you with the local expertise to address your in-country and around the clock needs, while supporting
your business as it grows internationally. Through a combination of offices in major financial hubs and an extensive network
of partners in established and emerging APAC locations, we can advise you on all aspects of business set-up and
management, from market entry to keeping your business compliant with the changing regulations in multiple jurisdictions.
• Access to Larger Markets
• One of the primary motivations for firms to go international is the desire to access larger markets. Domestic markets may
have limited growth potential, especially for companies in saturated industries. By expanding internationally, firms can tap
into new and potentially larger customer bases, allowing for increased sales, revenue, and business growth. Access to larger
markets enables firms to scale their operations and maximize their market potential.
• Potential for Higher Profits
• International expansion offers the potential for higher profits. Venturing into foreign markets may allow firms to benefit from
cost advantages, economies of scale, and favorable market conditions. By leveraging these advantages, companies can
enhance their profitability and generate higher returns on investment. Additionally, operating in markets with lower
production costs or favorable exchange rates can contribute to increased profit margins.
• Diversification of Risks
• Diversification of risks is another significant driver for firms to go international. Relying solely on a single domestic market
exposes companies to various risks, such as economic fluctuations, changes in consumer preferences, or political instability.
By expanding internationally, firms can spread their risks across different markets and reduce their vulnerability to
country-specific factors. This diversification strategy helps safeguard companies against unforeseen challenges and enhances
their overall resilience
• Access to Strategic Resources
• International expansion provides firms with access to strategic resources that may not be readily available in their home
country. These resources can include raw materials, skilled labor, advanced technologies, or specialized knowledge. By
accessing these resources, companies can gain a competitive advantage, improve their production processes, and enhance
their product offerings. Internationalization opens doors to new opportunities for resource acquisition and utilization.
• Competitive Advantage and Brand Enhancement
• Entering international markets can enhance a firm’s competitive advantage and brand image. By operating globally,
companies demonstrate their ability to compete on a larger scale and adapt to diverse market conditions. International
presence can enhance a firm’s reputation, credibility, and brand value. A strong global brand image can lead to increased
customer loyalty, trust, and recognition, which are essential for sustained business growth and success.
• Innovation and Learning
• International expansion fosters innovation and learning within firms. Engaging with different cultures, markets, and business
environments exposes companies to new ideas, perspectives, and approaches. This cross-pollination of knowledge and
experiences encourages creativity, drives innovation, and facilitates continuous improvement. International operations
enable firms to stay at the forefront of industry trends and develop a global mindset, leading to long-term growth and
competitiveness
CAGE Framework
 CAGE • Helps a firm to understand the
Framework distance (Difference) that the
target country has from the firm’s
home country on four dimensions.
The CAGE Distance Framework identifies
Cultural, Administrative, Geographic and
Economic differences / distances OR • Cultural Distance
closeness (similarity)
• Administrative Distance
• Geographic Distance
Used to understand patterns of trade,
capital, information, and people flows • Economic Distance

The greater the similarities, greater

Developed by Pankaj Ghemawat, a possibility of trade, 05 to 10 times more
professor at the University of
Navarra - IESE Business School in The greater the distance or
Barcelona, Spain
difference, the more risk exists
 Cultural • Different official languages
Distance • Different religions
the first and foremost facet of the CAGE • Traditions and values
analysis

invisible in nature but it has a huge impact

on the values and behaviors of the people
of the country affecting international
strategy and sales of the firm former colony of Great Britain, there is a
smaller cultural distance between USA
and UK

Affects certain
India - Nepal
Entertainment
type of Food industry
industry
industries more
Administrative Lack of colonial ties

Distance Lack of shared regional trading bloc

Lack of common currency

Political Instability

The legal and political democracy versus Rules and regulations

systems of the home communism
and target countries Type and role of Government
determine the (greater distance and
administrative distance more uncertainty)
EXIM Policy

Taxation
The laws and companies are required
regulations of the to pay employees a
country can have a thirteenth month of Corruption
serious effect on the salary in some countries
trade practices as Bonus
Google had to quit China
 Physical distance
Geographic Distance
Lack of land border

Differences in time zones

Differences in climates

Transportation
physical distance between
affected by the
the home and target
infrastructure of a country Communication
country

However, the factors of the Haiti is physically close to the US,

internet, social media, and but its lack of adequate port
technology have shrunk the
distance of transportation facilities make it a poor target
and Communication
Economic Distance National income

Size of GDP

Per capita Income

The greater the Purchasing power
fourth and last aspect of differences in the two
the CAGE analysis deals economies, the more
with Economic analysis difficult it is to be Distribution of wealth
successful.
Human resource availability

Disposable income
France
and Labour Cost

Bhutan
CAGE
 Modes of Entry into International Business
1. Exporting
2. Licensing
3. Franchising
4. FDI without Alliances
5. FDI with Alliances
6. Special Modes
(a) Contract Manufacturing
(b) Management Contract
(c) BPO
(d) Turnkey Projects
(e) Assembly options
(f) Third Country Operations
Export Entry Mode

shipment of products across Shipments may go directly to the

Most common strategy to enter in
national borders to fulfill foreign end user or through a distributor
international markets
orders or to a wholesaler.

Export can be divided into

mainly used in initial entry and

direct and indirect export
gradually evolves towards
foreign-based operations.
depending on the number and
type of intermediaries.
 Types of Exporting

Direct Exporting Indirect Exporting

(Direct exporting means sale of (In-direct exporting means sale of
goods abroad without involving goods abroad through middle men)
middlemen)

direct exporters sell directly to a consumer (B2C), a business

(B2B), or to a distributor in a foreign country
Direct Export

• A company takes full responsibility for making its goods available in

the target market by selling directly to the end-users.
• The exporter contracts with intermediaries in overseas markets like
distributors or agents to perform trading activities in target market.
• the firm has its own department of export which sells the products
via an intermediary in the foreign economy namely direct agent and
direct distributor.
• provides more control over the international operations
• increases the sales potential and also the profit.
• higher risk involved and more financial and human investments are
needed.
Direct Exporting By establishing company’s own corporate export provision.

Buying agents (also called Confirming By appointing foreign sales representative or buying agent.
houses) represent foreign firms that
want to purchase your products.
Through foreign based distributors and retailers/agents.
Seek lowest possible price
Paid a commission by their foreign
Through foreign based state trading corporation
clients.

Through overseas sales branches.

branch office is a representation of a

company in a foreign country that
usually can do commercial transaction
on its own
State Trading Corporation (STC) is
an international trading house
owned by the Government that
arranges the import of essential
goods into the country including
edible oils, sugar, wheat, and
hydrocarbons
Direct Export
Advantages of Direct Export:
• Access to the local market
• Shorter distribution chain
• More control over marketing mix
• Local selling support and services available.

Disadvantages of Direct Export:

• Little control over market price because of tariffs
• lack of distribution control (especially with distributors).
• investment required
• Cultural difference providing communications problems
• Trade restrictions.
 Indirect Exporting (Sell to Intermediaries)

• Involves exporting through domestically based export intermediaries

• The exporter contracts with intermediaries in the company‘s own market to
perform export functions in overseers market.
• In indirect export, the exporting company sells its products to
intermediaries (Export Management Companies (EMCs) and Trading
Companies)
• who in turn sell the same products to the end users in the target market.
• When an EMC functions as a distributor; it takes title to goods, sells them
on its own account, and assumes the trading risk.
• Alternatively, when it acts as an agent, it charges a commission.
• The intermediaries resume the responsibility of finding buyers/importers,
shipping products, getting payments etc.
Indirect Exporting

Advantages of Indirect Export:

• Limited resources and investment required.
• High degree of market diversification is possible as the company utilize
the internationalization of an experienced exporter.
• Minimal risk
• No export experience required

Disadvantages of Indirect Export:

• No control over marketing mix elements other than product.
• Less profit to producer.
• Lack of contact with market
Licensing is a business agreement involving two companies: one
gives the other special permissions, such as using patents or
copyrights, in exchange for payment.
Licensing

• Licensing is a method in which a firm gives permission to use its legally

protected product or technology (trademarked or copyrighted) and to do
business in a particular manner, for an agreed period of time and within an
agreed territory.

• It is a very easy method to enter foreign market as less control and

communication is involved.

• The financial risk is transferred to the licensee and there is better utilization
of resources.

• Based on the agreement, the licensor receives a onetime fee, a

royalty or both.
Licensing

Advantages of licensing:
• The ability to enter several foreign markets simultaneously by using several licensees
• Enter market with high trade barriers.
• It is a non-equity mode, therefore licensor make profit quickly without big investments. The firm does
not have to bear the development costs and risks associated with opening a foreign market.
• Licensing also saves marketing and distribution costs, which are left for the licensee.
• Licensing also enables the licensor to get insight of licensee’s market knowledge, business relations
and cost advantages.
• The licensor decreases the exposure to economic and political instabilities in the foreign country.
• Can be used by inexperienced companies in international business.

Disadvantages of licensing:
• There is a risk that the licensee may become a competitor once the term of the agreement concludes,
by using the licensor’s technology and taking their customers.
• The licensor’s income from royalties is not as much as would be gained when manufacturing and
marketing the product themselves.
• There is another risk that the licensee will under-report sales in order to lower the royalty payment
 Franchising

• Franchising is a form of technical collaboration for granting the right by a parent company (the
franchiser) to another (the franchisee) to do business in prescribed manner.

• Franchising is a form of licensing, which is most often used as market entry modes for
services such as fast foods, Education etc.

• provides the Know-How (Franchise Handbook), and the technical and commercial support for
distribution to be carried out.

• Franchising is somewhat like licensing where the franchiser gives the franchisee right to
use Intellectual Property Rights (commercial signs, brands, trademarks etc.).

• Franchising does not only cover products (like licensing) but it usually contains the entire
business operation including products, Managerial assistance, technological know-how,
marketing, Training and even the look of the business.
 Franchising

• The normal time for a franchisee agreement is 10 years and the

arrangement may include operation manuals, marketing plan
training and quality monitoring.

• The idea of the franchising chain is that all parties use a uniform
model in order to make the customer of a franchising chain may
feel that he is dealing with franchisor’s company itself.

• Normally when a company joins the franchising chain it pays a

one-time joining fee.
• As the operation goes on, the franchisee pays continues service fee
that usually are based on the sales volumes of the franchisee
company.
 Advantages of Franchising

✔ Risk of business failure is reduced

✔ Already established market share
✔ Recognized brand name and trade mark
✔ The franchisor gives you support (training, help setting up the
business, a manual telling you how to run the business and ongoing
advice)
✔ No prior/ specialised experience is required.
✔ A franchise enables a small business to compete with big businesses
✔ exclusive rights (The franchisor won't sell any other franchises in the
same territory.)
✔ Financing the business may be easier (Banks are sometimes more
likely to lend money to buy a franchise with a good reputation.)
 Disadvantages of Franchising
✔ Costs may be higher than you expect
✔ It usually includes restrictions
✔ franchisor monitoring
✔ The franchisor might go out of business.
✔ Other franchisees could give the brand a bad reputation, so the recruitment
process needs to be thorough.
✔ You may find it difficult to sell your franchise - you can only sell it to
someone approved by the franchisor
✔ All profits (a percentage of sales) are usually shared with the franchisor.
 Greenfield Investment
The strategy involves building everything the company needs from the ground (or green field) up.

Project on undeveloped site

This can include all facets of the business, from plant construction to marketing and distribution
channels.

New Factory
Power plans Airports
construction
 Advantages Advantages of Greenfield
•High level of quality control over the
manufacturing and sale of products and/or services

•High level of control over business

operations

•Bypassing trade
restrictions

•Creating jobs for the economy where the greenfield

investment is taking place

•Economies of scale and economies of scope can be

achieved in terms of marketing, research and
development, and production
 Disadvantages of a Greenfield Investment

An extremely high-risk investment – a greenfield

investment is the riskiest form of foreign direct
investment

Potentially high market entry cost (barriers to entry)

Government regulations that may hamper foreign

direct investments
Toyota Motor Corp. in Mexico
In 2015, Toyota Motor Corporation announced plans to establish a new manufacturing facility in Mexico through an
investment of about US$1 billion. Slated to open in 2019, the facility is expected to produce up to 200,000 units per year
in conjunction with the currently established Tijuana plant.

The rationale behind Toyota’s greenfield investment is to improve competitiveness in North America – specifically within
the United States. The comparative low labor cost and the close proximity to US markets offered the Japanese automaker
an attractive opportunity to establish an overseas manufacturing facility.
 FDI with Strategic Alliances
Merger and Acquisition

In merger, two companies come together but only one survives and the other goes out of
existence as it is merged in the other company. It means to be absorbed by something else and
lose individual identity.

While in acquisition, one company (acquirer) gets control over the other
company (acquired) at the willingness of each of the companies
 WHY COMPANIES MERGE..?

Companies merge because they have some benefits often called as Synergy.

Revenue synergies: Synergies that primarily Cost synergies: Synergies that reduce the company’s
improve the company’s revenue-generating cost structure. Generally, a successful merger may
ability. For example, market expansion, result in economies of scale, access to new
production diversification, and R&D technologies, and even elimination of certain costs. All
activities are only a few factors that can create these events may improve the cost structure of a
revenue synergies. company.
Types of Merger

• Horizontal merger: Merger of companies competing directly, operating in

the same market and offering similar products and/or services. (Allahabad
bank and Indian Bank)

• Vertical merger: Merging companies operate along the same supply chain
line. A vertical merger is a union between two companies in the same
industry but at different stages of the production process (Truck-Bus, Truck
Tyre)

• Conglomerate merger: Merging companies offer completely different

products and/or services.
 Horizontal merger
Horizontal Merger/integration refers to expansion of business at the
same point in the supply chain. This strategy is adopted when
companies have their existence in the same product line or market.

The goal of horizontal integration is to consolidate the market by acquiring or merging like
companies and exploit the market by monopolizing the industry

in consumer electronics, acquisition of Electrolux’s Indian

acquisition of Times Bank by HDFC Bank operations by Videocon International Ltd.
Vertical Merger
A vertical merger is a union between two companies in the same industry but at different stages of the
production process

A vertical merger can happen in two ways

When a firm acquires another firm which produces raw materials used by it. For e.g., a tyre
manufacturer acquires a rubber manufacturer, a car manufacturer acquires a steel company, a
textile company acquires a cotton yarn manufacturer etc.

when a firm acquires another firm which would help it get closer to the customer. For e.g., a
consumer durable manufacturer acquiring a consumer durable dealer, an FMCG company
acquiring an advertising company or a retailing outlet etc.
Conglomerate (Concentric) Merger
It refers to the combination of two firms operating in industries unrelated to each other. In this case, the
business of the target company is entirely different from those of the acquiring company, but companies
operate in same market with different product. They could be indirect competitor although their products
may or may not be complimentary to each other

These are of two types :Pure and Mixed.

For e.g., a steel manufacturer acquiring a software company etc (Pure, nothing in common). A sports shoe
manufacturer merge with sports T-shirts manufacturer (Mixed, for market extension) The main objective of
a conglomerate merger is to achieve big scale operation.

Conglomerate mergers are typically undertaken to reduce business risks.

conglomerate merger was the merger between the Walt Disney

Company and the American Broadcasting Company.
Wholly-Owned Subsidiary

A wholly-owned subsidiary is a company entirely owned and managed

by another company, known as the parent company.

A wholly-owned subsidiary is one whose 100% shares are held by the

parent company.
Key characteristics of a wholly-owned subsidiary
• Ownership. The parent company possesses a 100% equity stake in the
wholly-owned subsidiary, granting it full control over the subsidiary's assets,
operations, and decision-making.
• Legal independence. The wholly-owned subsidiary typically retains its legal status
as a separate entity. It may have its own board of directors and management
team.
• Financial integration. The parent company and its wholly-owned subsidiary
consolidate their financial statements and results for reporting purposes. The
wholly-owned subsidiary keeps its own financial records and tracks its assets and
liabilities; however, the parent company combines its financial statements with
the subsidiary.
• Control. The parent company controls the wholly-owned subsidiary's strategic
direction, business operations, work culture, and policies, such as appointing key
executives and managers. While subsidiaries are distinct entities, they may share
some executives or board members with the parent company.
• Risk and liability. Because the subsidiary functions as a distinct legal entity, as
opposed to a branch, it is responsible for its own finances, legal obligations, and
other liabilities.
Joint Venture

Strategy used by companies to enter a foreign market by joining hands and

sharing ownership and management with another company.
used to achieve some common objectives and expand international
operations

The joint venture is a form of strategic alliance where a local company and a foreign
entrant agree to share equity in running a partnership together

Hero Honda

Maruti Suzuki
Advantages of a Joint Venture

1 – New insights and expertise

2 – Better resources
3 – It is temporary
4 – Both parties share the risks and costs
5 –flexible
6 – Enhanced credibility
7 – Can save money by sharing advertising and marketing costs
8 – Improved economies of scale
 Risks of Joint Ventures
Pursuing separate objectives may threaten the success of the venture

Risk of revelation of technology & business secrets to others

Imbalance in the levels of expertise, investment, or assets brought into the venture by the
different parties may lead to problems between the two parties

Cultural mismatches and different management styles between the two firms engaged in the
JV can lead to poor integration and cooperation
 Special Modes

(a) Contract Manufacturing

(b) Management Contract
(c) BPO
(d) Turnkey Projects
(e) Assembly options
(f) Third Country Operations
Business model in which a firm
hires a contract manufacturer to
produce components or final
products based on the hiring
firm’s design.
When a foreign firm hires a local manufacturer to produce their
product or a part of their product it is known as contract
manufacturing.

This method utilizes the skills of a local manufacturer and helps in

reducing cost of production.

Nike – has its manufacturing done through contract manufacturing

China produces 30 per cent of air conditioners, 24 per cent of washing machines,
and 16 per cent of refrigerators sold in the US.

Contract manufacturing has also been used as a strategic tool for economic development in a
number of countries, such as Korea, Mexico, Thailand, China, etc. For instance,

Taiwan is a world leader in semi-conductor manufacturing.

Indian pharmaceutical companies find contract manufacturing an effective

tool for maintaining a high growth rate in view of limited resources for
research and development.
 Contract manufacturing offers a number of benefits:

1. Cost Savings: Companies save on their capital costs because they do not have to pay for a facility and the
equipment needed for production. They can also save on labor costs such as wages, training, and benefits. Some
companies may look to contract manufacture in low-cost countries, such as China, to benefit from the low cost of
labor.
2. Mutual Benefit A contract between the manufacturer and the company it is producing for may last several
years.

3. Advanced Skills: Companies can take advantage of skills that they may not possess, but the contract
manufacturer does. The contract manufacturer is likely to have relationships formed with raw material
suppliers or methods of efficiency within their production.

4. Focus: Companies can focus on their core competencies better if they can hand off base production
to an outside company.

5. Economies of Scale: Contract Manufacturers have multiple customers that they produce for. Because
they are servicing multiple customers, they can offer reduced costs in acquiring raw materials by
benefiting from economies of scale
Risks
• Lack of Control: When a company signs the contract allowing another company to produce their product,
they lose a significant amount of control over that product. They can only suggest strategies to the contract
manufacturer; they cannot force them to implement those strategies.
• Relationships: It is imperative that the company forms a good relationship with its contract manufacturer.
The company must keep in mind that the manufacturer has other customers. They cannot force them to
produce their product before a competitor’s.
• Quality: When entering into a contract, companies must make sure that the manufacturer’s standards are
congruent with their own. They should evaluate the methods in which they test products to make sure they
are of good quality.
• Intellectual Property Loss: When entering into a contract, a company is divulging their formulas or
technologies. This is why it is important that a company not give out any of its core competencies to contract
manufacturers.
• Outsourcing Risks: Although outsourcing to low-cost countries has become very popular, it does bring along
risks such as language barriers, cultural differences, and long lead times. This could make the management of
contract manufacturers more difficult, expensive, and time-consuming.
• Loss of Flexibility and Responsiveness: Without direct control over the manufacturing facility, the company
will lose some of its ability to respond to disruptions in the supply chain. It may also hurt their ability to
respond to demand fluctuations, risking their customer service levels.
 BPO

Cost effective strategy used by companies to reduce costs by transferring

portions of work

Outsourcing is a market entry strategy that leverages the expertise and critical
mass of proven service providers.

It allows companies to enter the market with minimal risk and financial
exposure and provides for fast start-up.
Common Types of Outsourced Work

• Content writing
• Customer support service
• Marketing
• Supply chain management
• Human resource management
• Accounting
• Engineering
• Research and design
• Computer programming services
• Tax compliance
• Finance
Turnkey Projects
a firm fully designs, constructs and • The project is handed over in
equips a production or service such a ready and up to date
facility and then the project is state that the purchaser just has
handed over to the purchaser to “turn the key” to bring the
upon completion. facility to ignition

A firm agrees to construct an

entire plant in a foreign country Delhi Metro
and make it fully operational. Bullet Train
Benefits of Turnkey Manufacturing

1. Reduced management time

2. No different know how needed: people who are already managing a different business and who want to
venture in another franchise business they do not need to start from scratch.

3. Less Risky: if you are not too experienced in business or this is a first business venture, a turnkey
operation will be the best franchise platform for you. turnkey operations have a much lower failure rate than
startup businesses internationally.
Disadvantages of a Turnkey Business

1. requires a substantial investment

2. risk of revealing companies secrets to rival
 MANAGEMENT CONTRACT

In a management contract, one company supplies the other

with managerial expertise.

Hotel Taj – 30 year management contract to operate and

manage its New York Hotel in the year 2005

• Technical operations such as production of products

• Management of human resources, including training of personnel
• Financial management of the organization such as accounting
• Marketing services, including promotions
 ADVANTAGES DISADVANTAGES

Able to save time and your resources. surrendering information about its
products, finances and other such
matters to another entity.
Helps in distribute responsibility better

The organization receives expertise conflict of interest.

and experience

transfers the operational control of

your business to the management
focus more on important areas or areas the company.
business is better at.
 Third Country Operations

Used to take advantage of friendly relations between two nations.

One country does not make direct investment in other nation, rather
investment is made in third nation.

Through this third nation, the investment is routed to destination

country.
 Assembly Operations
❑ An assembly operation is a variation on a manufacturing strategy

❑ According the US customs service, “assembly means the fitting or

joining together of fabricated components.”

❑ In this strategy, parts or components are produced in various

countries in order to gain each country’s comparative advantage.
Toyota operates manufacturing plants in foreign countries
with local labor, using local ad agencies, and pursing marketing
strategies that appeal to each country’s market segments and
consumer needs
 Having assembly facilities in foreign markets is very ideal particularly under two
condition….

(1) when there are economies of scale in the manufacture of parts and components

(2) when assembly operations are labour intensive and labour is cheap in the foreign country.
Advantages
1. Cost advantage : investment to be made in the foreign country is very
small in comparison with the expenditure required for establishing
complete manufacturing facilities
2. ‘local content’ demand : In some countries, such as Brazil where some 70
percent of the parts are produced locally, car manufacturers find no
option but to engage in assembly operations to produce for the local
markets.
3. Employment generation:
4. Investment to be made in the foreign country is very small in comparison
with that required for establishing complete manufacturing facilities
5. helps the firm to eliminate the high cost of shipping and high import
tariffs. (import duty is low in the part products than to finished goods)
Disadvantages of Assembly operations
1. Instability (A sudden regime change can also lead to economic
upheaval that can jeopardize the business's long-term success)

2. if the firm don't work with a local partner then they have to take all
the risks of the new market.