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Read the opening case, Vellus Pet Cosmetics, from page 408 (Chapter 9) of your textbook and answer the following questions:
(a) Why is it important for firms such as Vellus to seek international markets? (2 marks)
(b) Vellus could enter major overseas markets via a joint venture with pet cosmetic firms in those or by establishing a wholly owned subsidiary. Justify the most appropriate mode of entry Vellus. (Hint: consider the advantages and disadvantage of both modes of entry and highlight any applicable theory.) (6 marks)
(c) How important do you think the assistance provided by the Department of Commerce has been for Vellus Products' future? (2 marks)
(d) Firms such as Vellus benefit significantly from exporting, but so do regions and countries. In what ways can a region or a country benefit when firms within them begin exporting?
( 5 marks)
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The 3 primary reasons for foreign investments are (Kontinen & Ojala, 2010).
Increased product life cycle: Firms go overseas to find new potential buyers for their product. As in the case of Vellus, Sharon Doherty realized that the product is unique and superior to the competition in foreign markets and will lead to higher returns in the international market.
Economies of scale: For companies like Vellus, greater business expansion means a greater volume of demand allows the company to make prices more competitive.
Foreign competition: Often foreign competition may provide better quality goods at lower prices.
Wholly owned subsidiary operates independently of its parent company has its own management structure, and entirely own their products and clients (Holmlund & Kock, 2007).
The advantages of a wholly owned subsidiary:
Financial advantage: Parent company can also utilize the earnings from subsidiaries for the development of the business.
Operational advantage: The parent company has operational control over its wholly owned subsidiaries.
The disadvantages of a wholly owned subsidiary
Operational disadvantage: A company can have a huge dependency on the subsidiary to develop a distribution channel, and initiate a customer base etc.
Financial disadvantage: A malfunction at a subsidiary can affect the financial performance of the parent company.
A joint venture is the business agreement where two or more companies invest together to on new product, new business opportunities or costly projects. The companies share the costs and profits.
The advantages of entering into a joint venture are:
Financial resources and risk sharing – sharing of assets is one of the best advantages about the joint venture. Moreover, it's easy if someone shares the risk involved.
Technology, and methodologies–To grow and expand, firms need resources in the forms of methods, technology, and approach. Thus partnering with a company having all this helps.