11 - Starting International Business

Question 1

Small and Medium Enterprises

Answer 1

• According to the EU, SME’s are companies with less than 250 employees
• They have fewer resources than large firms and cannot simply buy up local firms to establish a foothold in a foreign market
• Compared with domestic business, transaction costs are higher in international business
• Foreign entry requires entrepreneurs, who are leaders identifying opportunities and taking decisions to exploit them
• Challenges of entrepreneurial firms occur at early stages of internationalization, including the basic transactions they may undertake

Question 2

Sporadic Exports

Answer 2

• Many firms start international business through direct exports, that is the sale of products to customers in another country
• This strategy is attractive for less experienced firms because they can reach foreign customers directly
• When domestic markets downturn, sales abroad may compensate. This is calles sporadic (or passive) exporting. Letter of credit (L/C) states that the importer’s bank will pay a specific sum of money to the exporter upon delivery.

Question 3

Intermediaries

Answer 3

• Direct exports represent the most basic mode, capitazlizing on economies of scale in production concentrated in the home country and affording better control over distribution
• Indirect exports is exporting through an intermediary
• Intermediaries are more common for standardized products and commodities (e.g. textiles, woods and meats), where competition focus on price
  
  • Local sales agents receive a commission on sales
  • Distributors trade on their own account: In other words, they buy the product and then sell them on in the local market at their own risk and using their own channels

Question 4

International Contracts: Contract Licensing

Answer 4

• Firm A’s agreement to give Firm B the rights to use A’s propriety technology (e.g. patent) or trademark for a royalty fee paid to A by B

Question 5

Contract Licensing: Licensor

Answer 5

The company granting a license

Question 6

Contract Licensing: Licensee

Answer 6

The company receiving a license

Question 7

Franchising

Answer 7

Franchising represents a similar idea as contract licensing, but it typically covers entire business concepts. Not only the product, service and trademark, but also the marketing strategy, operation manuals and quality control procedures.

Question 8

Franchising: Franchisor

Answer 8

The company granting a franchise

Question 9

Franchising: Franchisee

Answer 9

The company receiving a franchise

Question 10

Resources to support Internationalisation: Experiential knowledge

Answer 10

Knowledge learned by engaging in the activity and context

Question 11

Three stage Model of Internationalization

Answer 11

Stage 1: Early Internationalizers

Stage 2: Mid-Stage-Internationalizers

Stage 3: Highly Internationalized Firms

Question 12

Stage Model of Internationalization: Stage 1

Answer 12

Negative slope

• Liabilty of foreignness
• Initial learning costs
• Insufficient economies of scale

Question 13

Stage model of Internationalization: Stage 2

Answer 13

Positive slope

• Resource augmentation/exploitation
• Internalization of transaction costs
• Economies of scale and scope
• Extension of product life cycle
• Access to lower cost resources

Question 14

Stage model of internationalization: Stage 3

Answer 14

Negative Slope

• Cultural distance
• Coordinated costs of very dispersed markets
• Expansion into peripheral markets

Question 15

Traditional Internationalization Processes

Answer 15

• Experiential learning and knowledge acquisition
• Network building and exploitation

Question 16

Accelerated Internationalization Processes

Answer 16

• Building an entrepreneurial team with international experience
• Learning from importing and inward foreign investors
• Learning from others operating in the foreign country
• Acquiring resources in the foreign country, possible entire firms

Question 17

The ability of internationally inexperienced firms to engage in international business is to a large extent shaped by

Answer 17

1. The institutional environment of the home country: - Open economies with low trade barriers allow foreign entrants to challenge local firms, and thus indirectly encourage firms to pursue their opportunities abroad 2. Institutional distance between the home and host countries - The extent of similarity or dissimilarity between the regulatory, normative and cognitive institutions of two countries - Cultural distance is the difference between two cultures along some identifiable dimensions