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MGT602 - Entrepreneurship - Lecture Handout 12

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INTER NATIONAL ENTREPRENEURIAL OPPORTUNITIES (continued…)

LEARNING OBJECTIV ES

  1. To identify the aspects and importance of international entrepreneurship.
  2. To identify the important strategic issues in international entrepreneurship.
  3. To identify the available options for entering international markets.
  4. To present the problems and barriers to international entrepreneurship.

DIRECT FOREIGN INVESTME NT

The wholly owned foreign subsidiary has been the preferred mode of ownership for direct investment.

Minority interests The minority interest provides the firm with either a source of raw materials or a captive market for products. Entrepreneurs have used minority positions to gain a foothold in the market before making a major investment.
Joint ventures
Two firms get together and form a third company in which they share the equity. Joint ventures have been used by entrepreneurs in two situations:
1. When the entrepreneur wants to purchase local knowledge and an established facility.
2. When rapid entry into a market it needed. The keys to success of joint ventures have not been well understood. Reasons for forming a joint venture today are different than those in the past. Originally, joint ventures were used for trading purposes and were one of the oldest ways of transacting business. Joint ventures in the U.S. took the form of vertical joint ventures used by mining concerns and railroads. Motives for the significant increase in the use of joint ventures:

  1. To share the costs and risks of an uncertain project.
  2. To gain synergy between the two firms.
  3. To obtain a competitive advantage.
  4. To enter markets that pose entrance difficulties.

Majority interest Another equity method is to purchase a majority interest in a foreign business. The majority interest allows the entrepreneur to obtain managerial control while maintaining the company’s local identity. In technical sense anything over 50% of the equity of the firm is majority interest.

100 percent ownership
One hundred percent ownership assures control. One form of 100 percent ownership is mergers and acquisitions, but the entrepreneur needs to have a general understanding of the benefits and problems of mergers as a strategic option. A horizontal merger is the combination of two firms that produce closely related projects in the same area. A vertical merger is the combination of firms in successive stages of production. A product extension merger occurs when acquiring and acquired companies have related production but do not have directly competing products. A market extension merger is when two firms produce the same products but sell them in different areas. A diversified activity
merger
is a conglomerate merger involving the consolidation of two unrelated firms. Mergers are a sound strategic option for an entrepreneur when synergy is present. Economies of scale are the most common reason for mergers. A second factor that causes synergy is taxation, or unused tax credits. The final factor is the benefits received in combining complementary resources.

VU KEY TERMS

Indirect exporting

Selling goods to another country through a system in the entrepreneur’s home country

International entrepreneurship

An entrepreneur doing business across his or her national boundary

Joint venture

Two companies forming a third company

Licensing

Allowing someone else to use something of the company’s

Majority interest

Having more than 50 percent ownership position

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