International Business - UiTM (Diploma in Business Studies)

MGT361: INTERNATIONAL BUSINESS 

Question 13

Honda of Japan has recently set up its new manufacturing plant in Alor Gajah, Malacca. It has bought land and constructed new facilities and even hired transferred managers from Japan. New employees are also being hired from Malaysia itself. 

a) What foreign direct investment method has Honda embarked on in Alor Gajah, Malacca? Define this method?

 b) Give two (2) advantages and three (3) disadvantages of this method. 

Answer: 

a) The foreign direct investment method that Honda use is international franchising. International franchising is a specialized form of licensing in which the franchisor not only sell intangible property but also insists that the franchisee agree to abide by strict rules and how to do a business. 

b) The two advantages of this method are:

1. Franchisees can enter the business. The franchisees can enter a business that has an established and proven product and operating system. For example, the company of Disney had opened a franchise in Singapore. The franchisees in Singapore can enter the market easily because the company of Disney is well established and well known by people around the world. Therefore, the franchisors can gain more profit rather than face losses. 

 2. Franchisors can obtain valuable information The franchisors can obtain valuable information about local market customs and cultures from host country entrepreneurs that are otherwise might have difficulty obtaining. It further can learn valuable lesson from the franchisees that apply to more than the host country. For example, franchisor who had a franchise in other country such as Japan can obtain all information regarding the market’s needs and wants in that country. In term of food, Japan’s local market preferred the healthy foods in their daily lifestyles. 

The three disadvantages of this method are:

1. Shared the revenues earned Both parties that are the franchisor and franchisee must according to agreement, share the profit earned at the franchised location. Even though the franchisee do all the work and franchisor did not do their job in the operation system, the franchisor will still get the profit because all profit earned will be shared together. This will give the franchisees feel the unfairness in term of their profit earned. 

2. More complicated International franchising is more complicated than domestic franchising. For example, if McDonald wants to expand their market and have a franchise in India, it had to learn about the Indian’s culture such as do not serves meat in their menu because the citizens in that country do not eat meat. Besides, to have an international franchise all regulations and laws in foreign countries need to be obeyed. The different level of taxes for a franchise to establish in foreign countries may also occur. 

3. Loss need to be settle by both parties When the franchisor’s business are not doing well and have to face a lot of losses, the franchisors have to involve with the settlement. For example, Ginvera’s company who had a franchise in Greenland faces losses because the Greenland’s local market did not need their products. Therefore, they need to settle all the losses with a fair settlement between both parties. Both parties had to settle all the loss even though the parties that do the wrong things were the franchisees and not the franchisors.

Prepared by: Syahida Abd Aziz (2011)

Diploma in Business Studies (UiTM Perlis)