Modes of Foreign Involvement

The modes of foreign operations differ in terms of both the amount a firm commits to foreign operations and the percentage of resources located at home or in host countries. Among the many modes available to the company from which it can choose, the following six are the principal ones:

Export of products from home country: If a company wishes to minimize risks and costs of exporting, marketing, and manufacturing abroad, it might secure an export broker or other specialist who would handle all foreign negotiations and procedures. The company can, therefore, avoid the complexity involved in managing multinational operations and can thus simply trade internationally. Usually, this mode of operation is preferable to a company that has little experience in international operations. Exporting at an initial stage can then be followed by one of the other modes.

Licensing: Under an international licensing agreement, a firm (the licensor) grants rights to a foreign firm (the licensee). The rights may be exclusive or non-exclusive and may refer to patents, trade marks, copy rights, or special know-how. Under licensing the licensor agrees to furnish technical information and assistance; the licensee agrees to exercise its rights aggressively and to compensate the licensor for services rendered. For example, a publishing company may grant rights to its copyrighted books to foreign publishers; a drug company may license foreign companies to sell its patented products in other countries.

Franchising is essentially a way of doing business in which the franchisor gives an independent franchisee use of trademarks, patents, or other valuable intangible assets: the franchisee conducts the business within an agreed area under the limitations of the agreement. Sometimes the franchisor provides supplies, managerial assistance, and other resources not generally available to the franchisee. Foreign hotels chains such as Holiday Inn and Hilton, rental car agencies, including Hertz and Avis, and fast-food outlets like McDonald’s and Kentucky Fried Chicken, widely use franchises as a means of securing local acceptance in foreign markets and a mode for rapid expansion.

Joint ventures: The Joint ventures involve sharing ownership with others and is usually formed for the achievement of a limited purpose. Joint ventures have increased in use because many countries give preference to local businesses. A multinational company with foreign ownership and control can often interest a locally owned and operated business to join with it and thereby provide local identification. Many joint ventures are on a fifty-fifty basis; some involve 51% ownership by the multinational giving it managerial control; others have 51% ownership by the local company in countries requiring local control. The greatest advantage of joint ventures is in their flexibility and adaptability. The Japanese early recognized the advantages of joint ventures as a means of implementing their expansion into foreign markets.

Management contracts: In the last decade, management contracts have become a popular form of MNC involvement since it is merely a service contract requiring no capital investment. In communist countries, which, by definition, restrict private company operations and in some developing countries such as Saudi Arabia, where management skills and other operating services are limited, the management contract may be the only means by which the MNC can participate. The MNC can receive compensation for its management skills without any direct foreign investment. Occidental Petroleum, Pullman Company, and others experienced in dealing with controlled economies have extensively used management contracts.

Foreign subsidiary: The foreign subsidiary, often 100% owned by the MNC, makes initial direct investments in other countries and operated foreign plants as part of its global network of manufacturing and marketing. This mode is preferred by those MNCs desiring maximum managerial control and willing to assume greater risks of foreign operations. The selection of the subsidiary as a mode of foreign involvement requires rigorous analysis of many variables, since it commits the company to the greatest exposure to risks of foreign operations and management.