Methods of Entry into Foreign Markets

By selling products or services to foreign markets, a company expands its customer reach, which allows it to increase its sales and profits as well as gain brand recognition. It also reduces the risk associated with operating in one market and extends its product’s life cycle. Once a company has identified a target destination, the next step entails choosing the best way to enter the new market. In selecting the method that best suits it, a company has to decide whether to establish an export base or license its products in a strategy aimed to gain experience in the newly targeted market/country. In events where the potential benefits associated with first-mover status justify a bolder move, the company can decide to ally, make an acquisition, or even start a new subsidiary. It is worth noting that many organizations opt to move from exporting to licensing to a higher investment approach, treating these choices as a learning curve. Notably, there are five main entry methods into foreign markets: exporting, licensing and franchising, partnering and strategic alliance, acquisition, and Greenfield venture, whereby each has its advantages and disadvantages. In making an informed decision, firms need to evaluate their options to choose an entry mode that best suits their strategy and goals.

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Exporting

            Exporting entails marketing and direct sales of domestically produced goods in a foreign country. It is a well-established traditional method of reaching foreign markets. Considering that the mode does not require the production of goods in the target country, it does not involve investment in foreign production facilities. Notably, most of the costs associated with exporting take the form of marketing expenses (Onyusheva, 2020). According to Onyusheva, while it is a relatively low-risk entry mode into foreign markets, exporting involves substantial costs and limited control. Companies that adopt this mode typically have little control over the marketing and distribution of their products, incur high transportation charges and possible tariffs, and have to pay distributors for a variety of services. Moreover, exporting does not give an organization firsthand experience in establishing a competitive position abroad (Schmid, 2018). Consequently, this makes it difficult to customize commodities to foreign tastes and preferences.

            Nonetheless, it is worth noting that exporting stands out as the easiest way to enter a foreign market. As a result, most firms begin their international expansion through this entry mode. Its main advantage is that it allows firms to avoid the hefty expenses associated with establishing operations in a foreign country. However, for it to work, companies must have a way to market and distribute their commodities in the new country. Normally, firms address this necessity through contractual agreements with a local distributor (Watson IV et al., 2018). When a firm opts to utilize this entry mode, it must give thought to packaging, labeling, and pricing to ensure they appropriately suit the target market. Regarding marketing and promotion, a company will have to let potential buyers know of its presence, either through advertising, local salesforce, or trade shows (Onyusheva, 2020). A common factor in exporting is the need to translate the product or service into the language of the target country. It is also worth noting that firms mostly export to countries close to their production facilities to lower transportation costs.

Licensing and Franchising

            When a company wants to quickly access a foreign market while taking limited financial and legal risks, it can consider licensing agreements with foreign firms. Licensing allows a foreign company (the licensee) to sell the products of the producer (the licensor) or use its intellectual property in exchange for royalty fees. Thus, an international licensing agreement permits a country in the target country to use the property right of the licensor (Watson IV et al., 2018). Since little investment on the part of the licensor is required, licensing has a considerable potential to provide a sizeable return on investment. Licensing, therefore, reduces cost and involves limited risk. However, since the licensee must produce and market the product, potential returns might be lost. Moreover, licensing does not mitigate the substantial disadvantages associated with operating from a distance (Schmid, 2018). According to Schmid, as a rule, licensing strategies inhibit control and only produce moderate returns.

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            Another popular entry mode that firms can utilize to expand overseas is selling franchises. Under this entry mode, a firm (the franchiser) grants a foreign firm (the franchiser) the right to use its brand and name to sell its commodities. An international franchise agreement gives the franchisee the responsibility for all its operations but agrees to operate as per a business model established by the franchiser. On the other hand, the franchiser provides advertising, training, and new-product assistance (Dinu, 2018). Dinu elucidates that franchising is a natural form of global expansion for firms that operate domestically following a franchise model such as restaurant chains and hotel chains.

Partnering and Strategic Alliance

            Another way to enter foreign markets is through strategic alliances with a local partner. Notably, a strategic alliance entails a contractual agreement between two or more enterprises seeking to cooperate in a particular way for a specified time to achieve a common objective. Before entering into this type of agreement, both firms have to determine if the alliance is a suitable approach. The firm seeking to enter the foreign market must evaluate what value the partner will bring to the business venture in terms of both tangible and intangible aspects. One of the advantages of partnering with a local firm is that it likely understands the local market, culture, and ways of doing business better than an outside company (Dinu, 2018). A partner is especially valuable if they have a reputable, recognized brand in the target market or have existing relationships with customers in the market that the expanding company seeks to gain access.

            In recent years, strategic alliances and joint ventures have become increasingly popular. They allow firms to share risks and resources required to enter foreign markets. Similar to licensing and franchising, resources may have to be shared. However, unlike licensing and franchising, strategic alliances give the expanding company a degree of flexibility – one that it could not have afforded through direct investment. Strategic alliances facilitate market entry, allow risk and reward sharing, technology sharing, joint product development, and conformation to government regulations. Other benefits include distribution channel access and political connections (Dinu, 2018). It is worth noting that strategic alliances are only favorable when; one, when the partners’ strategic goals converge and their competitive goals diverge. Two, when the partners’ market power, size, and resources are small compared to the market leaders. Three, the partners can learn from each other while limiting access to their proprietary skills (Onyusheva, 2020). On the other hand, the disadvantages of partnering include lack of direct control and the possibility that the partners’ goals might differ at some point.

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Acquisition

            An acquisition refers to a transaction whereby a company gains control of another firm by purchasing it. This entry mode into foreign markets is appealing because it gives the expanding firm quick established access to the target market. However, compared to the other three discussed foreign entry modes, it is more expensive (Onyusheva, 2020). When deciding on an acquisition strategy, companies examine the laws in the target country. As a foreign market entry mode, the acquisition is a good strategy when a large scale is needed. It is also a good strategy when an industry is consolidating. However, they are considerably risky. According to Bandick and Sanneh (2018), many studies have shown that between 40% and 60% of all acquisitions fail to increase the acquired firm’s market value by more than the amount invested.

Greenfield Venture

            The above-discussed approaches to foreign market entry allow firms to participate in foreign markets without investing in foreign facilities and plants. However, as markets expand, a firm might deem it necessary to enhance its competitive advantage by directly investing in foreign countries’ operations through foreign direct investments and subsidiaries. Known as Greenfield Venture, this form of market entry entails establishing a new wholly-owned subsidiary in a foreign market by constructing facilities from the start. This strategy provides a high degree of control in the operations as well as a firm’s ability to better know the consumers and the competitive environment (Dinu, 2018). However, among the five strategies, it requires the highest level of resources and commitment.

            Thus, Greenfield Venture represents the most expensive commitment that a firm can make to a foreign market. It is normally driven by the size and attractiveness of the target market. A common form of foreign direct investment is a foreign subsidiary, which refers to an independent company owned by a foreign firm. The strategy not only gives the parent company full access to the target foreign market but also exempts it from any regulations or laws that may constrain the activities of the venture. The parent firm has considerable control over the subsidiary’s operations. Due to the level of control and access this approach provides, it is not surprising that most of the world’s largest companies have subsidiaries (Dinu, 2018). Coca Cola and IBM are some of the multinational corporations with subsidiaries across the globe.

Conclusion           

To sum up, there are various methods that a firm can utilize in its foreign market entry market strategy. The five most common methods include exporting, licensing and franchising, partnering and strategic alliance, acquisition, and Greenfield venture. In deciding which method to adopt, it is important that a firm evaluate each entry mode’s advantages and disadvantages. It is also important to establish which entry mode best suits the company’s goals and objectives. To make an informed decision, a company needs to establish how much of its resources it is willing to commit and how much control it wishes to attain. The fewer the resources the company wishes to commit to its foreign market entry operation, the better it is suited to enter through licensing, franchising, or other contractual bases. On the other hand, the more control a firm wants, the better off it is establishing or buying a wholly-owned subsidiary or enter the foreign market through a joint venture.

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