The Six Modes of International Business

The six major modes of international business are imports and exports, tourism and transportation, licensing and franchising, turnkey operations, management contracts, and direct and portfolio investment.

Imports and exports are the most common mode of international business, particularly in smaller companies even though they are less likely to export. Large companies are more likely to engage in other modes of international business in conjunction with importing and exporting. Companies may import and export merchandise, defined as tangible goods brought into or out of (respectively) a country. While exports and imports apply mainly to goods, they can also apply to services, or nonproducts.

Most service imports and exports revolve around tourism and transportation. The revenue gained from international tourism and transportation is best seen in hotels, airlines, travel agencies, and shipping companies. For many countries, especially in the Caribbean and Southeast Asia, their income on foreign tourism is more important than their income from exports. The same holds true in countries such as Norway and Greece, who earn a considerable amount from foreign shipping.

Many companies enter into international licensing agreements, allowing other countries around the world to use their assets (ie: trademarks, patents, copyrights, or expertise) under contract, receiving royalty payments in return. Similarly, many companies engage in franchising, a mode of business where the franchisor allows the franchisee to use a trademark that is an essential part of the franchisee's business. For example, Gloria Vanderbilt has franchised her name out to several clothing companies, forming the Gloria Vanderbilt line. The franchisor also assists on a continuing basis in the operation of the business-for example, by providing components, management services, and technology.

Companies also pay fees that may be incurred on an international level for engineering services handled through turnkey operations and management contracts. A turnkey operation involves construction of facilities, performed under contract, which is then transferred to the owner when the company is ready to begin operating. Management contracts are initiated when one company supplies personnel to perform general or specialized management functions for another company. This is most evident in Disney's theme parks in France, Japan, and China.

Finally, international business occurs within direct and portfolio investments. By investing in a foreign company, the investor takes ownership in a foreign property for a financial return. A foreign direct investment (the more common of the two) gives the investor a controlling interest in the foreign company. When two or more companies share in an FDI, it is known as a joint venture. When a government joins a company in an FDI, it becomes a mixed venture. Conversely, a portfolio investment is a noncontrolling interest in a company that usually involves either taking stock in a company or making loans to a company in the form of bonds, bills, or notes that the investor purchases. Portfolio investments are particularly popular with multinational enterprises as they offer a safe means towards short-term financial gain.