The core business of an organization is an idea that is formulated by the organization that stipulates the main agenda of the business.
Global value chains are activities that firms in a specific field of an industry get involved in on the global scale to ensure the production of valuable goods to the market.
A non-equity mode of entry refers to entry of an organization into a foreign market through exports and contracts of agreement.
Countervailing power of partners is the ability of an organization to keep a more resourceful or more powerful partner.
Franchising mode of entry into a market refers to the way small and partly independent firms (franchises) agree to use patents and trademarks of a large parent company in their business activities. As a rule, the franchises also use the parent company’s style of management and record keeping in running their businesses. Franchises usually occur due to the great influence the parent company has on the market. A good example of a parent firm that has used this mode of entry into foreign markets is the soft drink manufacturer Coca Cola Company and British Petroleum (BP).
Franchising offers business agreements that are usually long-lasting. In addition to that, the franchisor usually gives the franchise a lot of operational support, including initial training in the operations of the business, managerial systems, equipment, and sometimes skilled labor. The franchisor also helps in assessing and approving the suitable site for the franchise to set up their premises. Organizations tend to choose this mode of entry into a market, since it has many advantages. If the franchise partners are selected appropriately, they offer a lot of investment benefits to the firm and, therefore, facilitate expansion. Also, franchising enhances simultaneous and hence fast expansion of a firm in different parts of the world. It involves low political and expense risks since it is less costly.
In this mode of entry, the licensor allows another firm in a foreign country, a licensee, to produce goods which were initially produced by the licensor for a specific period of time. This form of entry involves limited support to the firm in the foreign country in terms of business operations. Some of the support received is the use of the licenser’s trademarks, patents, rights, system of management, as well as technology. They may also add training, but not so often. Licensors receive their cut of the sales as an agreed percentage of the licensee sales, which is usually a onetime payment. International firms choose this type of entry mode since it involves fewer political risks. This is because most licensee firms are usually almost 100% owned locally. It also allows for faster and quicker expansion into foreign markets without the necessity of physical presence. It allows for increased investment and an improved image of an international firm, especially if the partner is correctly chosen. With the improved image of the international firm, it also paves way for actual investment of the company rather than licensing.
Contract Manufacturing and Service Outsourcing
A contract manufacturer is a manufacturer who has been hired by another company to produce certain goods for a fee. The contract manufacturer now acts as a factory of the hiring firm. The contract manufacturer provides information on expenses, design, and equipment and labor needed.
Service outsourcing is just like contract manufacturing, but it also involves abstract products. A hiring firm delegates duties to another firm.
An international firm chooses contract manufacturing since it is cost saving in that a company does not need the required equipment for production. Furthermore, the cost of labor can be reduced since they are not directly involved in hiring and training laborers. It also enhances the focus on production because the delegation is done to a company that specializes in that field of production. This facilitates the production of high-quality goods and services. The delegating company also enjoys services of highly skilled professionals, since they source for the best in that specific field.
Contract farming is the type of farming where an agreement is struck between a farmer and a seller. In the contract, the farmer produces a certain quantity of goods which should meet set standards and at a stipulated time. In turn, the buyer agrees to purchase all the goods at a pre-determined price. As a rule, other than buying, the buyer supports the farmer by organizing transport and assisting in getting the farm inputs. They are also allowed to offer technical advice.
Investors choose this mode of entry into the market since they are assured of the market for their products. It also involves low risks because the prices are pre-determined. Moreover, it helps the investor to access the local market faster.
Mode that Has the Highest Local Value
Franchising is the mode of entry into a foreign market that allows for high benefits in the local country. This is because apart from providing the local firms with the rights, trademarks, and patents to produce goods, other supportive acts of the franchisor are included. They include training, which enhances skills in the market, since trained employees can use their skills obtained elsewhere. Also, the equipment provided allows local people to enjoy quality products from their local firms. The ability of local firms to use the franchisor’s managerial systems also equips the locals with new managerial skills. From this, they can decide not to copy directly but modify and apply their skills in other areas of the economy.
Mode that Generates Highest Export Earning
The mode that generates the highest export earning is contract farming. This is because, apart from the fact that there is a ready market for products, the prices are already predetermined. This allows the producing firm to negotiate prices, with which they can get the highest revenue possible. Also, the support received from the buyer in terms of farm inputs, transport, and technical knowhow reduces the cost of production.
a) Even though the productivity of US white-collar work may provide benefits to individual firms, it may be widespread enough to lead to unfavorable terms of trade. The deterioration of these terms of trade may cause actual losses instead of profits.
b) The costs associated with income distribution may reduce the output of US firms. This is because most of the GDP in the US economy is distributed to big investors. This makes average workers resist offshoring, which, therefore, limits revenue gained from offshoring. If they are compensated, the increased cost of production will pass to consumers leading to a fall in the market demand.
There are three studies about the US offshoring of white-collar work that Josh Bivens disputed. These include the McKinsey Global Institute, the Global Institute, and Catherine Mann’s studies. In the MGI study, Bivens argues that even though the study relates the general growth of the US economy to the good performance of initially established American firms outside the US, they ignored offsetting costs to the U.S. economy of terms of trade effects and the necessity to finance increasing imports.
On the other hand, the GI study has its estimates too high. It has assumed huge cost savings and that these cost savings are effected by consumers by offering them goods at low costs. Furthermore, it relies largely on computer software cost savings in that if mechanical ways are affected, the results will be very inaccurate.
In Catherine Mann’s findings, it is inaccurate to state that the globalization of IT hardware increased GDP growth by 0.3% yearly from 1995-2001.
I support Bivens’ claims, since most of the assumptions made in those three studies ignore many other factors that affect the market of American products such as diplomatic relations and the presence of competitors in the market.
Stakeholders’ Efforts to Maximize the Benefits of Offshoring
Investors should provide high quality and highly technological equipment for production. This should be accompanied by appropriate training in host countries, which will allow for the maximum use of the equipment. Investors should also provide good support services, including high remunerations to the host countries. This will motivate host country workers and enhance better productivity. Also, when structuring the managerial system, investors should allow locals to be in the managerial board. This will cultivate the spirit of goodwill between the investors and the hosts.
On the other hand, the hosts’ political system should be favorable in terms of investment. They should provide benefits such as EPZs where the investors operate in the host country for some time before starting to pay taxes. They should also be fair in their taxing system. Moreover, they should be ready to offer incentives to foreign investors to encourage production and build a good rapport. This will increase investment returns to investors and, therefore, their countries’ economy.