Page 2 - Microsoft Word - CH-7-HOME ASSIGNMENT 32 Types of Preference Shares & ESOP

• Since exporting/importing does not require much of investment in foreign countries,
exposure to foreign investment risks is nil or much lower than that is present when firms opt
for other modes of entry into international business.

Limitations

Major limitations of exporting/ importing as an entry mode of international business are as
follows:

• Since the goods physically move from one country to another, exporting/importing involves
additional packaging, trans-portation and insurance costs. Especially in the case of heavy
items, transportation costs alone become an inhibiting factor to their exports and imports. On
reaching the shores of foreign countries, such products are subject to custom duty and a
variety of other levies and charges. Taken together, all these expenses and payments
substantially increase product costs and make them less competitive.

• Exporting is not a feasible option when import restrictions exist in a foreign country. In
such a situation, firms have no alternative but to opt for other entry modes such as
licensing/franchising or joint venture which makes it feasible to make the product available
by way of producing and marketing it locally in foreign countries.

• Export firms basically operate from their home country. They produce in the home country
and then ship the goods to foreign countries. Except a few visits made by the executives of
export firms to foreign countries to promote their products, the export firms in general do not
have much contact with the foreign markets. This puts the export firms in a disadvantageous
position vis-à-vis the local firms which are very near the customers and are able to better
understand and serve them.
Despite the above mentioned limitations, exporting/importing is the most preferred way for
business firms when they are getting initially involved with international business. As usually
is the case, firms start their overseas operations with exports and imports, and later having
gained familiarity with the foreign market operations switch over to other forms of
international business operations.

Contract Manufacturing

Contract manufacturing refers to a type of international business where a firm enters into a
contract with one or a few local manufacturers in foreign countries to get certain components
or goods produced as per its specifications. Contract manufacturing, also known as
outsourcing, can take three major forms:

• Production of certain components such as automobile components or shoe uppers to be used
later for producing final products such as cars and shoes;

• Assembly of components into final products such as assembly of hard disk, mother board,
floppy disk drive and modem chip into computers; and
• Complete manufacture of the products such as garments.