Modes of operations in international business

When pursuing international business, an organization must decide on one of the suit­able modes of operations included in Figure 1. In the following sections, we dis­cuss each of these modes in some detail.

Merchandise Exports And Imports

Exporting and importing are the most popular modes of international business, espe­cially among smaller companies. Merchandise exports are tangible products – goods – that are sent out of a country; merchandise imports are goods brought into a country. Because we can actually see these goods as they leave and enter the country, we some­times call them visible exports and imports. When an Indonesian plant sends athletic shoes to the United States, the shoes are exports for Indonesia and imports for the United States. For most countries, the export and import of goods are the major sources of inter­national revenues and expenditures.

Service Exports And Imports

Note that the terms export and import often apply only to merchandise, not to services. When we refer to products that generate nonproduct international earnings, we use the terms service exports and service imports. The company or individual that provides the service and receives payment makes a service export; the company or individual that receives and pays for it makes a service import. Currently, services constitute the fastest growth sector in international trade. Service exports and imports take many forms, and in this section, we discuss the most important:

1. Tourism and transportation

2. Service performance

3. Asset use

Tourism and Transportation Let's say that the Williams sisters, Venus and Serena, take Air France from the United States to Paris to play in the French Open tennis tournament.

Their tickets on Air France and travel expenses in France are service exports for France and service imports for the United States. Obviously, then, tourism and transportation are important sources of revenue for airlines, shipping companies, travel agencies, and hotels.

The economies of some countries depend heavily on revenue from these sectors. In Greece and Norway, for example, a significant amount of employment and foreign- exchange earnings comes from foreign cargo carried by Greek and Norwegian shipping lines. Tourism earnings are more important to the Bahamian economy than earnings from export merchandise.

Service Performance Some services – including banking, insurance, rental, engineering, and management services – net companies earnings in the form of fees – payments for the performance of those services. On an international level, for example, companies may pay fees for engineering services rendered as so-called turnkey operations, which are often construction projects performed under contract and transferred to owners when they're operational. The U.S. company Bechtel currently has a turnkey contract in Egypt to build a nuclear plant to generate electricity. Companies also pay fees for management contracts – arrangements in which one company provides personnel to perform general or specialized management functions for another. Disney receives such fees from managing theme parks in France and Japan.

Asset Use When one company allows another to use its assets – such as trademarks, patents, copyrights, or expertise – under contracts known as licensing agreements, they receive earnings called royalties. For example, Adidas pays a royalty for the use of the Real Madrid football team's logo on hooded jackets it sells. Royalties also come from franchise contracts. Franchising is a mode of business in which one party (the franchisor) allows another (the franchisee) to use a trademark as an essential asset of the franchisee's business. As a rule, the franchisor (say, McDonald's) also assists continuously in the operation of the franchisee's business, perhaps by providing supplies, management services, or technology.

Investments

Dividends and interest paid on foreign investments are also considered service exports and imports because they represent the use of assets (capital). The investments them­selves, however, are treated in national statistics as different forms of service exports and imports. Note that foreign investment means ownership of foreign property in exchange for a financial return, such as interest and dividends, and it may take two forms: direct and portfolio.

Direct Investment In foreign direct investment (FDI), sometimes referred to simply as direct investment, the investor takes a controlling interest in a foreign company. When, for example, a Japanese investor bought the Seattle Mariners, the baseball team became a Japanese FDI in the United States. Control need not be a 100% (or even a 50%) interest – if a foreign investor holds a minority stake and the remaining ownership is widely dispersed, no other owner may be efficient at countering the decisions of the foreign investor.

When two or more companies share ownership of an FDI, the operation is a joint venture.

Although the world's 100 largest international companies account for a high pro­portion of global output, the vast number of companies using FDI means that it's also common among smaller companies. Today, about 79,000 companies worldwide control about 790,000 FDIs in all industries.

Portfolio Investment A portfolio investment is a noncontrolling financial interest in another entity. A portfolio investment usually takes one of two forms: stock in a company or loans to a company (or country) in the form of bonds, bills, or notes purchased by the investor. They're important for most companies with extensive international operations, and except for stock, they're used primarily for short-term financial gain – as a relatively safe means of earning more money on a firm's investment. To earn higher yields on short-term investments, companies routinely move funds from country to country.