Modes of Entry into International Markets

Modes of entry into an international market are the channels which an organization employs to gain
entry to a new international market.
When an organization has made a decision to enter an overseas market, there are a variety of options
open to it. These options vary with cost, risk, the degree of control which can be exercised over them
and the commitment of resources they require. They also vary according to the foreign market
conditions, the company’s internal expertise and management capability and the degree of adaptation
of the product.

Exporting Modes (Externalization)

There are direct and indirect approaches to exporting to other nations. Direct exporting is

straightforward. The main characteristic of direct exports entry model is that there are no
intermediaries. Essentially the organization makes a commitment to market overseas on its own behalf
and controls its distribution channels. It also has greater control over its brand and operations overseas.
On the other hand, if it turns to domestically based export intermediaries namely agents and/or
distributors to represent them further in that market and to become the face of the company there,
then it is called indirect exporting. In this case, the exporter has no control over its products in the
foreign market.

Contractual/Intermediate Modes

Licensing
Licensing is a relatively sophisticated arrangement where a firm transfers the rights to the use of a
product or service to another firm for a fixed term in a specific market. It is a particularly useful
strategy if the purchaser of the license has a relatively large market share in the market the company
wants to enter. (Coca Cola is an excellent example of licensing. In Zimbabwe, United Bottlers have the
license to make Coke)
In this foreign market entry mode, a licensor in the home country makes limited rights or resources
available to the licensee in the host country. The rights or resources may include patents, trademarks,
managerial skills, technology, and others that can make it possible for the licensee to manufacture and
sell in the host country a similar product to the one the licensor has already been producing and selling
in the home country without requiring the licensor to open a new operation overseas. The licensor
earnings usually take forms of one time payments, technical fees and royalty payments usually
calculated as a percentage of sales.

Following are the main advantages and reasons to use an international licensing for expanding
internationally:
 Obtain extra income for technical know-how and services
 Reach new markets not accessible by export from existing facilities
 Quickly expand without much risk and large capital investment
 Pave the way for future investments in the market
 Is highly attractive for companies that are new in international business.

On the other hand, international licensing is a foreign market entry mode that presents some
disadvantages and reasons why companies should not use it as:
 Lower income than in other entry modes
 Loss of control of the licensee manufacture and marketing operations and practices leading to loss
of quality
 Risk of having the trademark and reputation ruined by an incompetent partner
Franchising
The franchising system can be defined as: "A system in which semi-independent business owners
(franchisees) pay fees and royalties to a parent company (franchisor) in return for the right to become
identified with its trademark, to sell its products or services, and often to use its business format and
system."

Franchising works well for firms that have a repeatable business model (eg. food outlets) that can be
easily transferred into other markets. The organization puts together a package of the ‘successful’
ingredients that made them a success in their home market and then franchise this package to
overseas investors. McDonalds is a popular example of a Franchising option for expanding in
international markets.
Compared to licensing, franchising agreements tends to be longer and the franchisor offers a broader
package of rights and resources which usually includes: equipment, managerial systems, operation
manual, initial trainings, site approval and all the support necessary for the franchisee to run its
business in the same way it is done by the franchisor.

Advantages of the international franchising mode:

 Low risk
 Low cost
 Allows simultaneous expansion into different regions of the world
 Well selected partners bring financial investment as well as managerial capabilities to the operation.

Disadvantages of franchising to the franchisor:

 Maintaining control over franchisee may be difficult
 Conflicts with franchisee are likely, including legal disputes
 Preserving franchisor's image in the foreign market may be challenging
 Requires monitoring and evaluating performance of franchisees, and providing ongoing assistance
 Franchisees may take advantage of acquired knowledge and become competitors in the future

Partnering
Partnering is almost a necessity when entering foreign markets. Partnering can take a variety of forms
from a simple co-marketing arrangement to a sophisticated strategic alliance for manufacturing.
Partnering is a particularly useful strategy in those markets where the culture, both business and social,
is substantively different than your own as local partners bring local market knowledge, contacts and if
chosen wisely customers.
There are many examples of alliances including:
 Shared manufacturing e.g. Toyota Ayago is also marketed as a Citroen and a Peugeot.
 Distribution alliances e.g. iPhone was initially marketed by O2 in the United Kingdom.

Essentially, Strategic Alliances are non-equity based agreements i.e. companies remain independent
and separate.

Joint Venture
Joint Ventures tend to be equity-based i.e. a new company is set up with parties owning a proportion of
the new business. Joint ventures are a particular form of partnership that involves the creation of a
third independently managed company. It is the 1+1=3 process. Two companies agree to work
together in a particular market, and create a third company to undertake this. Risks and profits are
normally shared equally. The best example of a joint venture is Sony/Ericsson Cell Phone. There are
five common objectives in a joint venture: market entry, risk/reward sharing, technology sharing, joint
product development, and conforming to the government regulations. Successful JVs are far and few
and in most cases after a few years in business, the partners tend to grow apart and end their JV for
various reasons.
Investment Modes

Wholly Owned Subsidiaries (WOS)

A wholly owned subsidiary includes two types of strategies: Greenfield
investment and Acquisitions. This is also known as Foreign Direct Investment (FDI)

 Greenfield Investments
Greenfield investments require the greatest involvement in international business. A greenfield
investment is where you buy the land, build the facility and operate the business on an ongoing basis in
a foreign market. It certainly holds the highest risk due to the costs of establishing a new business in a
new country and setting up a presence from scratch, but some markets may be so attractive to
undertake the cost and risk due to lenient government regulations, minimized transportation costs, or
the ability to access technology or skilled labor. A firm may need to acquire knowledge and expertise of
the existing market by third parties, such consultant, competitors, or business partners. This entry
strategy takes much time due to the need of establishing new operations, distribution networks, and
the necessity to learn and implement appropriate marketing strategies to compete with rivals in a new
market.

 Buying a local Company / Acquisition / Brownfield Investment

In some markets buying an existing local company may be the most appropriate entry strategy. This
may be because the company has substantial market share, is a direct competitor to you or due to
government regulations this is the only option for your firm to enter the market. It is certainly the most
costly mode of entry and determining the true value of a firm in a foreign market will require
substantial due diligence. On the plus side this entry strategy will immediately provide you the status of
being a local company and you will receive the benefits of local market knowledge, an established
customer base and be treated by the local government as a local firm.

Overseas Manufacture (Home manufacture and foreign assembly or foreign

manufacture)
A business may decide that none of the other options are as viable as actually owning an overseas
manufacturing plant i.e. the organization invests in plant, machinery and labor in the overseas market.
This is also a form of Foreign Direct Investment (FDI). This can be a new-build, or the company might
acquire a current business that has suitable plant etc. Of course you could assemble products in the
new plant, and simply export components from the home market (or another country). The key benefit
is that you will gain local market knowledge and be able to adapt products and services to the needs of
local consumers and make them ready for international sales.

Businesses may have to use different market entry methods for different countries i.e. some countries
will only allow a restricted level of imports but may welcome the business in building manufacturing
facilities to provide jobs and limit the outflow of foreign exchange.  Additionally, some market entry
methods are questionable on a practical basis i.e. a possible lack of suitable distributors or agents to
sell and service the product. To summarize, the selection of a market entry mode is of strategic
importance and therefore it is vital to make an informed assessment before embarking upon any
international business dealings.

Selected from online articles