Forms of organization in Foreign Markets

Establishment of Branches and/or plants:
The Company may decide to have its own branch or plant in a foreign market. If a firm has branch abroad it might be able obtain complete knowledge of the market. The branch may be able to provide after sales services facilities in a more effective manner. It may also hold goods as ready stocks to provide off the shelf delivery to the buyers. It will also act as a showroom for company’s products. If a company has a branch on a foreign market, it adds to the company’s prestige, both in India and in the foreign market covered. Again a sales branch can be effective in countering a competitor’s campaign.

Foreign branches could be established to take care of regional requirements. For example, a pharmaceutical company in India has established a branch at Lagos to look after the requirements of Ghana, Ivory Coast and Cameroon besides Nigeria. Its office at Singapore caters to the requirements of ASEAN countries, South Korea, Taiwan and Hong Kong.

Establishment of a branch would necessarily involve a lot of expenditure. In fact, the company has to choose between efficiency and high overheads. The volume of business, however, provides the real answer to this question. Ofcourse, establishment of a branch abroad is conditioned by the regulations of the importing country.

If the volume of business so justifies, a company may decide to have a plant in the foreign country either for assembly or for assembly and manufacturing both. There are many advantages of foreign manufacturing:

(1) Savings in transport costs, (2) conditions of national aspirations of the importing country, (3) availability of cheaper raw materials and/or labor, and (4) very importantly, overcoming tariff and non tariff barriers. Moreover, it enables the firm to make items tailored to local consumer preferences.

Faced with anti-dumping duties being levied on some of the export items in the EEC, Japan has set up almost instantaneously a large number of assembly plants, which are derisively labeled screw driver factories. Under this system, the Japanese company ships the parts and components in which no anti-dumping duties are levied and just assembles the final product in the EEC. Legally speaking, the products so turned out become ‘European made’ and can be supported from one EEC member to another. Such assembly plants have been set up for photocopiers, electronics scales, bucket wheel dredgers etc – the very product in which anti-dumping duties have been imposed.

Licensing Arrangements: The company may enter in to an agreement with a firm in the importing country whereby to permit the latter to manufacture goods in the former’s brand name in exchange of a royalty. Thus, the exporting company allows the company in the importing country the use of its brand name, patent rights, trade marks and copyrights and provides the necessary know how for it. In many cases, this is the only way to overcome tariff barriers and import restrictions. There is practically no investment on the part of the exporting company. Moreover, there is no risk of nationalization. This is the best way for a company which wants to establish an overseas presence with a minimum of investment and risk. It is a favored strategy for small and medium sized companies. But selection of suitable licenses may create a problem. There are two problems: (1) Quality control may be difficult to achieve, and (2) the importing company may decide to compete with the exporting company in third markets. The latter danger is very often sought to be controlled by putting restrictions on exports in the licensing agreement itself.

Joint ventures are a via media between the establishment of a plant abroad and the licensing arrangement. In joint ventures, the exporting company has some investment and a voice in its management too. The exporting company may be able to utilize the specialist skills of a local partner. It may also have the advantages of (1) higher returns than royalties and (2) greater control on production and marketing. But it does involve greater investment of capital and higher risks. However, the risk of nationalization is much less because of the investment of a national party.

Appointment of Exclusive Agents: This is the most widely used method. It is the simplest and the least expensive. An agent is the sole representative of the manufacturer in the importing country. He may, however, handle non-competing lines. He does not operate on his own account and gets a commission for his services.

A distributor is the sole importer of the manufacturer’s products. He buys and holds large stocks. In return, he may be granted exclusive rights. He usually operates on his own account. He may also own wholesale and retail outlets. He provides repair and service facilities as well.