Lecture 7 - Starting International Business

Question 1

Define SMEs and mention 3 challenges they face

Answer 1

= Small and medium enterprises: Firms with less than 500 employees (US) and less than 250 employees (EU)

1) Fewer resources than larger firms - hard to engage in FDIs

2) Higher transactions costs

3) Foreign entry requires entrepreneurs to identity business opportunities and make decisions to exploit them

Question 2

Which option does SMEs have for going international?

Answer 2

1) Exporting
2) Licensing
3) Franchising
4) Subcontracting

Question 3

Define Exporting and the 2 types

Answer 3

= Selling of products and/or services to another country

1) Direct Exports
-Sale of goods directly to costumers in other countries

2) Indirect Exports
-Exporting through an intermediary either:
*Domestic: if based in exporters country i.e. trading company
*Foreign: Based in the host market i.e. distributers or sales agents

Question 4

What are 3 advantages of direct exports?

Answer 4

1) Capitalizes on economies of scale

2) Enables control over distribution

3) Treats foreign demand as an extension of the local demand

Question 5

Mention a challenge that direct exports imposes and a possible solution

Answer 5

1) Lack of trust increases transaction costs

Solution: Letter of credit

Question 6

Mention 2 advantages of indirect exports

Answer 6

1) Intermediaries buy the products and sell them at their own risk using their own channels

2) Relatively worry-free because intermediaries handles most activities
Eg. Cross-cultural communication and international payment

Question 7

What are challenges of Indirect Exports and their solutions

Answer 7

1) Information asymmetry:
-The distributer may control the local host market and only share selected information with the company

Solution:
-Instead: Direct export with local sales office offering costumer support

Question 8

Mention the 3 main types of contracts used in IB, their core idea and what 3 aspects they combine

Answer 8

1) Licensing
2) Franchising
3) Subcontracting

Core Idea: to transfer property rights for a royalty fee but without necessarily being involved in local operations

Contracts combine:
1) Export and imports of goods and services
2) Transfer of rights
3) Allocation of risks and profits

Question 9

Mention 3 potential issues with licensing

Answer 9

1) Agreement on a price/royalty fee
2) Licensor licenses the product to several other companies
3) Licensee may not ensure the quality of the goods and services expected of the trademark

Question 10

Mention 2 issues with Franchising

Answer 10

1) Franchiser does not have control over production and marketing and how the technology and brand names are being used

2) Requires intensive training and continuous communication

Question 11

Mention the advantages of licensing and franchising for each part

Answer 11

Licensors and franchisers:
1) Possibility to expand international with little capital

Licenses and franchisee:
1) Opportunity to build business by:
-Leverage a famous brand name
-Getting training and technology transfer
-Learning how to operate at world class standards

Question 12

What 2 options are there if a foreign licensee or franchisee refuses to improve quality?

Answer 12

1) Suing them in a court abroad
2) Discontinuing the relationship with them

Question 13

Define Subcontracting and mention 2 advantages

Answer 13

= A contract that involves outsourcing on an intermediate stage of a value chain to a company abroad that performs the activity more efficiently.

1) Saving costs on labor intensive processes
2) Accessing specialized expertise

Question 14

What is the main challenge of Subcontracting?

Answer 14

Limited control on what is happening at the subcontractor’s plant

Question 15

What are the 3 steps of internationalization models?

Answer 15

1) Uppsala model
2) Network internationalization model
3) Stages model

Question 16

Explain the Uppsala model

Answer 16

Internationalization as a gradual step by step proces in which firms increase their commitment to foreign market as they acquire more experiential knowledge.

Question 17

Explain the Network internationalization model

Answer 17

= An extension of the Uppsala model
Networks plays an important role as they
1= Provide access to assets, talent, technology and knowledge of potential consumers, suppliers and competitors

2= Facilitate access to information and organizational learning and helo reduce resource deficiencies

3= Firms in network reinforce each others learning and expertise

Question 18

Explain the Stage Models

Answer 18

= The 3rd step in the internationalization models

Firms goes in a slow stage by stage process with an increasing degree of commitment.
Would enter culturally and institutionally close markets first

Question 19

Define Born Globals

Answer 19

= Companies that from inception build their competitive advantages in the use of resources and the sale in multiple countries

Question 20

Explain the 2 stages of the Traditional Internationalization process and the 4 stages of the Accelerated Internationalization Process

Answer 20

Traditional:
1) Experiential learning and knowledge acquisition
2) Network building and exploitation

Accelerated:
1) Building an entrepreneurial team with international experience

2) Learning from importing and inward foreign investors

3) Learning from others operatin in the foreign country

4) Acquiring resources in the foreign country possible entire firms

Question 21

What is the internationalization process for SMEs shaped by?

Answer 21

1) Home and host country’s institutional environment

2) Institutional distance between home and host countries