4.3: Opportunities in International Business

The fact that nations exchange billions of dollars in goods and services each year demonstrates that international trade makes good economic sense. For a company wishing to expand beyond national borders, there are a variety of ways it can get involved in international business. Let’s take a closer look at the more popular ones.

Importing and Exporting

Importing (buying products overseas and reselling them in one’s own country) and exporting (selling domestic products to foreign customers) are the oldest and most prevalent forms of international trade. For many companies, importing is the primary link to the global market. American food and beverage wholesalers, for instance, import the bottled waters Evian and Fiji from their sources in the French Alps and the Fiji Islands respectively for resale in U.S. supermarkets.^[1] Other companies get into the global arena by identifying an international market for their products and becoming exporters. The Chinese, for instance, are fond of fast foods cooked in soybean oil. They also have an increasing appetite for meat. Therefore, they need high-protein soybeans to raise livestock. The United States exported $15.06 billion worth of soybeans to China in 2023, making it the top destination for U.S. soybean exports.^[2]

A few reasons why companies may engage in importing include:

• Importing to reduce costs, as importing may be more affordable than producing the same product locally.
• Importing new products before competitors in an attempt to become a leader in the industry.
• Importing non-core products allows businesses to focus on their specialties. For instance, a company might specialize in manufacturing brake pads for cars while relying on other companies or countries to supply the remaining car parts.
• Importing increases competition for domestic products. Companies may import products from other countries to compete with other businesses selling domestic products.

A few reasons why companies may engage in exporting include:

• Exporting can help a company reach new markets or expand in existing markets, and increase sales and profits.
• Exporting can spread business risk by diversifying into multiple markets instead of one domestic market.
• Exporting can improve a company’s competitiveness against both domestic and international competitors.
• Exporting can lead to enhanced innovation and the acquisition of new skills.
• Exporting can help boost a company’s profile and credibility.
• Exporting may allow a company to take advantage of trade agreements with reduced trade barriers.
• Exporting can help a company manage seasonal product use and market fluctuations.
• Exporting may allow a company to take advantage of exchange rates, depending on which currency is at a higher rate.

When goods are shipped from one country to another, they must go through customs. Customs is the process of declaring and paying taxes on imported goods. All countries have different regulations for what can and cannot be imported. Some items, such as drugs or weapons, are prohibited because they are dangerous. Other items, such as used tires or chemicals, are restricted because they may harm the environment. The purpose of customs is to protect a country’s economy, environment, jobs, and residents.

Licensing and Franchising

A company that wants to get into an international market quickly while taking only limited financial and legal risks might consider licensing agreements with foreign companies. An international licensing agreement allows a foreign company (the licensee) to sell the products of a producer (the licensor) or to use its intellectual property (such as patents, trademarks, copyrights) in exchange for what is known as royalty fees. Here’s how it works: You own a company in Canada that sells coffee-flavoured popcorn. You’re sure that your product would be a big hit in Japan, but you don’t have the resources to set up a factory or sales office in that country. You can’t make the popcorn here and ship it to Japan because it would get stale. So, you enter into a licensing agreement with a Japanese company that allows your licensee to manufacture coffee-flavoured popcorn using your special process and to sell it in Japan under your brand name. In exchange, the Japanese licensee would pay you a royalty fee — perhaps a percentage of each sale or a fixed amount per unit.

The best way to understand licensing is to think about something that a company owns that they agree to sell to another company to use, either locally or globally. For example, Lego, a company that produces building block toys, had to get a license from companies like Disney when they wanted to create their Star Wars Lego sets.

Another popular way to expand overseas is to sell franchises. Under an international franchise agreement, a company (the franchiser) grants a foreign company (the franchisee) the right to use its brand name and to sell its products or services. The franchisee is responsible for all operations but agrees to operate according to a business model established by the franchiser. In turn, the franchiser usually provides advertising, training, and new-product assistance. Franchising is a natural form of global expansion for companies that operate domestically according to a franchise model, including restaurant chains, such as McDonald’s and Kentucky Fried Chicken, and hotel chains, such as Holiday Inn and Best Western. Unlike franchising in the franchisor’s home country, where the franchisor grants the franchisee a license to use the marketing, branding and operations of the franchisor, international franchising usually involves actually selling the franchise rights to a third party to operate as the master franchisee in that area, giving them the rights to open company-owned outlets and sub-franchise in the country or region.^[3]

Contract Manufacturing and Outsourcing

Canadian companies are increasingly drawing on a vast supply of relatively inexpensive skilled labour to perform various business services, such as software development, accounting, and claims processing. This is known as outsourcing. In contrast, contract manufacturing is a specific type of outsourcing related specifically to products when two parties sign a contract manufacturing agreement.

Because of high domestic labour costs, many U.S. and Canadian companies manufacture their products in countries where labour costs are lower. This arrangement is called international contract manufacturing, a form of outsourcing. A domestic company might contract with a local company in a foreign country to manufacture one of its products. It will, however, retain control of product design and development and put its own label on the finished product. Contract manufacturing is quite common in the U.S. apparel business, with most American brands being made in a number of Asian countries, including China, Vietnam, Indonesia, and India.^[4]

Thanks to twenty-first-century information technology, non-manufacturing functions can also be outsourced to nations with lower labour costs. Canadian companies are increasingly drawing on a vast supply of relatively inexpensive skilled labour to perform various business services, such as software development, accounting, and claims processing. With a large, well-educated population with English language skills, India has become a centre for software development and customer call centres. In the case of India, the attraction is not only a large pool of knowledge workers but also significantly lower wages.

Strategic Alliances and Joint Ventures

A strategic alliance is an agreement between two companies (or a company and a nation) to pool resources in order to achieve business goals that benefit both partners. A strategic alliance and a joint venture are both collaborative business arrangements between companies, but they differ in structure, commitment, and goals.

Strategic Alliance

What if a company wants to do business in a foreign country but lacks the expertise or resources? Or what if the target nation’s government doesn’t allow foreign companies to operate within its borders unless it has a local partner? In these cases, a firm might enter a strategic alliance with a local company or even with the government itself.

A strategic alliance is an agreement between two companies (or a company and a nation) to pool resources in order to achieve business goals that benefit both partners. Alliances range in scope from informal cooperative agreements to joint ventures— alliances in which the partners fund a separate entity (perhaps a partnership or a corporation) to manage their joint operation.

An alliance can serve a number of purposes:

• Enhancing marketing efforts
• Building sales and market share
• Improving products
• Reducing production and distribution costs
• Sharing technology
• Sharing risks

With a strategic alliance, companies remain legally independent, and the focus is on sharing resources, knowledge, and access to markets. The agreement is typically less binding and easier to dissolve compared to a joint venture. An example of a strategic alliance is Starbucks and PepsiCo partnering to market and distribute Starbucks-branded ready-to-drink beverages globally. Strategic alliances are used to enter new markets, share technological expertise, or achieve cost efficiencies without significant financial or operational commitment.

A few examples of a strategic equity alliance (one company buys equity in the other, or both buy equity in each other) are given below:

• One prominent example of a successful strategic partnership is the partnership between Apple and Nike. This collaboration brought together Apple’s technological expertise and Nike’s extensive knowledge in sports and fitness. Through this partnership, they created the Nike+ iPod, a product that revolutionized the way people track their workouts using their iPod and Nike shoes.^[5]
• Tesla and Panasonic formed a strategic alliance to build Tesla’s Gigafactory, a large-scale battery manufacturing plant in the United States. This collaboration focuses on producing lithium-ion batteries to support Tesla’s electric vehicles (EVs) and energy storage products. Under the agreement, Tesla manages the land, buildings, and utilities for the Gigafactory, while Panasonic manufactures and supplies cylindrical lithium-ion cells. Panasonic also invests in production equipment and machinery. By co-locating suppliers and optimizing manufacturing processes, this partnership aims to reduce battery costs through economies of scale. The Gigafactory’s output supports Tesla’s goal of producing mass-market EVs, such as the Model 3, and lowering energy storage costs across applications. The alliance highlights the strategic benefit of combining Tesla’s EV expertise with Panasonic’s battery technology to advance sustainable energy solutions and the EV market.^[6]

Non-equity strategic alliance is when two companies share resources and proprietary information. An example of this is between SkipTheDishes and restaurants across Canada to offer food delivery services. Restaurants do not share long-term goals or proprietary information with SkipTheDishes. The relationship is primarily transactional. Restaurants gain access to a delivery platform and customer base, while SkipTheDishes expands its offerings.

Joint Venture

A joint venture involves two or more companies forming a new, independent legal entity to pursue a specific business objective or project. The companies share ownership, profits, risks, and governance in the newly created entity. This typically involves significant capital investment and a long-term commitment. The joint venture ends when the project or objective is completed unless extended by the parties. An example of a joint venture is Sony Ericsson, which was the resulting company formed by Sony and Ericsson to produce mobile phones (eventually acquired by Sony). Another prime example of a joint venture is the partnership between NASA and Google, which created the business Google Earth. Another example is SIA and TATA, which ventured into forming Vistara Airlines out of India. Joint ventures are used when there are large-scale, resource-intensive projects, entering highly regulated markets, or pooling expertise for mutual benefit. Refer to Table 4.1 for a comparison of the key differences between strategic alliances and joint ventures.

Media Attributions

“Lego, Stormtrooper, Cycling image.” by aitoff, used under the Pixabay license.

“Sports, Nike, Sneakers image” by Abiris, used under the Pixabay license.