TYPES OF BUSINESS FIRMS

Domestic Corporation
A firm incorporated under the laws of the country or state in which it does business. For example, a firm incorporated in the United States is considered a domestic corporation in the United States, but a foreign corporation elsewhere

Foreign Corporation
A firm that conducts business in states or countries other than the state or country in which it is incorporated, For example, a firm incorporated in Canada but conducting business throughout North America is considered a foreign corporation in the United States. Also called an alien corporation.

Multinational Corporations
Multinational corporations are companies that operate in more than one country. The name “multinational corporation” is distinct from “international corporations”. The latter name was used in the 1960s to designate a company with a strong national identification. The home market was the company’s primary focus. Foreign operations were usually wholly owned subsidiaries controlled home country nationals. By the 1980s, international corporations had evolved into more globally oriented companies. While still maintaining a domestic identity and a central office in a particular country, multinational corporations now aim to maximize profits on a worldwide basis. The corporation is so large and extended that it may be outside the control of a single government. Besides
subsidiaries, a multinational corporation may have joint ventures with individual companies, either in its home country or foreign countries. Some multinationals enter foreign markets buying stakes in companies of a particular country.

Complex business organizations

Mergers
In business a merger is a combination of two companies into one larger company. Such actions are commonly voluntary and involve stock swap or cash payment to the target. Stock swap is often used as it allows the shareholders of the two companies to share the risk involved in the deal. A merger can resemble a takeover but result in a new company name (often combining the names of the original companies) and in new branding; in some cases, terming the combination a “merger” rather than an acquisition is done purely for political or marketing reasons.

Classifications of mergers

  1. Horizontal merger – Two companies that are in direct competition and share similar product lines and markets (e.g. Sirius/XM)
  2. Vertical merger – A customer and company or a supplier and company. (eg: an ice cream maker merges with the dairy farm whom they previously purchased milk from; now, the milk is ‘free’)
  3. Market-extension merger – Two companies that sell the same products in different markets (e.g. GTE and Bell Atlantic into Verizon)

Categories of mergers
Mergers may be broadly classified in Cogeneric and Conglomerate.

Cogeneric: within same industries and taking place at the same level of economic activity- exploration, production or manufacturing wholesale distribution or retail distribution to the ultimate consumer.

Conglomerate: between unrelated business. Two companies that have no common business areas

Acquisition
An acquisition, also known as a takeover or a buyout, is the buying of one company (the ‘target’) another. An acquisition may be friendly or hostile. In the former case, the companies cooperate in negotiations; in the latter case, the takeover target is unwilling to be bought or the target’s board has no prior knowledge of the offer. Acquisition usually refers to a purchase of a smaller firm a larger one. Sometimes, however, a smaller firm will acquire management control of a larger or longer established company and keep its name for the combined entity. This is known as a reverse takeover. The buyer buys the shares, and therefore control, of the target company being purchased. Ownership control of the company in turn conveys effective control over the assets of the company, but since the company is acquired intact as a going concern, this form of transaction carries with it all of the liabilities accrued that business over its past and all of the risks that company faces in its commercial environment.

Franchising is an arrangement where one party (the franchiser) sells the rights to another party (the franchisee) to market its product or service. There are different types of franchise relationship and this is a possibility for international expansion. It is an attractive option for companies seeking international expansion without having to undertake substantial direct investments. In recent years this has increased in numbers and in popularity. They exist when an individual or group of individual (the franchise) raises a sum of money to buy the opportunity to;

  • Use an established model and name e.g. wimpy, steers, ken chic e.t.c.
  • Sell or distribute an established or recognized product
  • Take advantage of marketing and advertising which is organized centrally the franchise e.g. coke.

A franchise is a legal contract that binds the two parties and hence each has to meet his/her side of bargain. This type of business has lower risk as compared to the other since the machinery and the brand are well established and the business ride on them.

Advantages of the franchisee

  1. Protected environment in which to open a business
  2. Access to free help and advice from specialist and experts i.e. the franchiser (proven management style)
  3. A ready market
  4. Name recognition- most franchise are nationally or internationally known this can significantly increase the demand for the product. Examples for such include, MacDonald, Holiday Inn.
  5. Financial support, some franchisees receive some financial support from the
     Franchisor.

Advantages to the franchiser

  • Business expansion is achieved
  • Business risk is shared
  • Franchisee are self-motivated
  • Access is gained to very wide market- many outlets.

Licensing is where a company (the licensor) authorizes a company in another country (the licensee) to use its intellectual property in return for certain considerations, usually royalties. Licensors are usually multinationals located in developed countries Joint ventures are usually a jointly owned and independently incorporated business venture involving two or more organizations. This is a popular method of expanding abroad as each party can diversify, with the benefit of the experience of the others involved in the venture and a reduction in the level of risk. Where a large number of members are involved in such an arrangement, this is called a consortium.

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