Market Entry Modes
When it comes to getting your products into a foreign market there are several strategies that companies use worldwide. The simplest form of market entry is by exporting. This strategy allows businesses to maintain their current business model and production line while sending goods to a foreign market for distribution. Due to its low cost of implementation and reduced level of risk for business owners when compared to other strategies, exporting is one of the most basic and common types of entry into foreign markets for small businesses worldwide. Exporting goods into a new market also allows a company to judge how well items will sell and what, if any, adjustments are required to the existing product so that it reaches its optimum performance in that market.
Another form of market entry is through direct ownership of a business in another country. Sometimes a company may desire to own and operate their own business in a foreign market. The most standard form of direct ownership is by the way of greenfield investment which is a type of foreign direct investment where a company starts a new business venture in a foreign country by constructing new physical operational facilities from the ground up. By doing this, the company creates long-term jobs in the foreign country and stimulates economic activity. As a result, the new company will typically be offered tax breaks and other incentives as governments often see the loss of corporate tax revenue as a small price to pay for job creation and the transfer of knowledge and technology. The potential pitfalls to this strategy need careful consideration. For instance, the success of the new company is highly dependent on the political and economic climate of the foreign location. The company also incurs greater risk and financial outlay. However, the negatives may far outweigh the limitless potential gains of such an investment.
Licensing and franchising offer another option of breaking into foreign markets without establishing a physical presence on the ground. Licensing is a more sophisticated arrangement which usually involves a contractual agreement or license between the two companies whereby the domestic company grants a company operating in a different country or jurisdiction, the right to use a product, productive process, service, a patent or registered brand, a trade secret or other intangible asset, in exchange for an initial fixed payment, a royalty, or both. The home company, for the most part, is able to maintain some form of control and simply hands over certain operating rights to the foreign company in addition to a large chunk of the profits. While licensing eliminates many of the expenses and time involved with expanding overseas, it does require constant monitoring, training, and renewal of various permits and other legal documents. It may even require the stationing of a local manager to oversee the operations in the foreign location. Franchising works well for firms that have a repeatable business model (like a food outlet) that can be easily transferred into other markets. A franchise is only successful if the business model being duplicated is very unique or has strong brand recognition that can be capitalized on at an international level. Though similar to licensing, franchising differs because the domestic company tends to be more directly involved in the development and control of the marketing programme. Carefully thought-out and executed franchise arrangements see firms with several multinational locations accompanied by a recognized brand, all at little to no risk.
Another method of market entry is to establish a type of business partnership called a joint venture whereby two firms agree to collaborate in a particular geographic or product market in a foreign country. This partnership between the home and foreign companies usually results in the creation of a third independently-managed firm allowing for the sale of the home firm’s goods and services in the foreign location. While similar to licensing, the major difference in this arrangement is that the domestic company has an equity position and a management voice in the foreign firm. This gives the firm better control over overseas operations and provides greater access to market peculiarities. Risks and profits are normally shared equally and may result in double the financial power and twice the marketing ability.