When a company makes the commitment to go in the international market, it must choose an entry strategy. This decision should reflect the an analysis of market characteristics (such as potential sales, strategic importance, cultural differences and country restrictions) and company capabilities including the degree of near market knowledge, marketing involvement and commitment that management is prepared to make. Even so many firms simply imitate others in the industry or repeat their own successful entry strategies.
A company has four different modes of foreign market entry from which to select exporting, contractual agreements, strategic alliances and direct foreign investment. The different modes of entry can be further classified on the basis of the equity or nonequity requirements of each mode. The alternative market strategies can be shown in the following figure:
1. Exporting: Exporting can be either direct or indirect. With direct exporting, the company sells to a customer in another country. This is the most common approach employed by companies taking their first international step because the risks of financial loss can be minimized.
In contrast, indirect exporting usually means that the company sells to a buyer (importer or distributor) in the home country who in term exports the product.
Licensing and franchising
Joint venture and consortia
Direct foreign investor
Greater control and greater risk
Early motives for exporting often are to skim the cream from the market or gain business to absorb overhead. Early involvement may be opportunistic and come in the form of inquiry from a foreign customer or initiatives from an importer in the foreign market.
a. The internet: The internet is becoming increasingly important as a foreign market entry method. Initially, internet marketing focused on domestic sales. However, a surprisingly large number of companies started receiving orders from customers in other countries, resulting in the concept of international internet marketing. Many companies already started the selling and marketing activities through internet which is called on-line business. Dell Computer Corporation expanded its strategy of selling computer over the internet to foreign sites as well.
b. Direct sales: Particularly for high technology and big-ticket industrial products, a direct sales force may be required in the foreign country. This may mean establishing an office with local and/or expatriate managers and staff depending of course on the size of the market and potential sales revenues.
2. Contractual agreement: Contractual agreements are long term, nonequity associations between a company and another in the foreign market. Contractual agreements generally involve the transfer of technology, processes, trademarks or human skills. In short, they serve as a means of knowledge rather than equity. Contractual agreements include licensing and franchising.
a. Licensing: It is a means of establishing a foothold in foreign markets without large capital outlays is licensing. Patent rights, trademark rights and the right to use technological processes are granted in foreign licensing. It is a favorite strategy for small and medium sized companies, although it is by no means limited to such companies.
b. Franchising: It is rapidly growing form of licensing in which the franchisor provides a standard package of products, systems and management services and the franchisee provides market knowledge, capital and personal involvement in management.
3. Strategic international alliances: A strategic international alliance (SIA) is a business relationship established by two or more companies to cooperate out of mutual need and to share risk in achieving a common objective. Strategic alliances are sought as a way to shore up weaknesses and increase competitive strengths. Opportunities for rapid expansion into new markets, access to new technology, more efficient production and marketing costs, strategic competitive moves and access to additional sources of capital are motives for engaging in strategic international alliances. The SIA includes international Joint Ventures (IJV) and consortia.
a. International joint venture: International joint ventures (IJUs) as a means of foreign market entry have accelerated sharply since the 1970s. Besides serving as a means of lessening political and economic risks by the amount of the partner’s contribution to the venture. IJVs provide a less risky way to enter markets that pose legal and cultural barriers than would be the case in an acquisition of an existing company.
4. Consortia: Consortia are similar to the joint ventures and could be classified as such except for two unique characteristics: (1) they typically involve a large number of participants and (2) they frequently operate in a country or market in which none of the participants is currently active. Consortia are developed to pool financial and managerial resources and to lessen risks.
4. Direct foreign investment: A fourth mean of foreign market development and entry is direct foreign investment, that is, investment within a foreign country. Companies may manufacture locally to capitalize on low cost labor, to avoid high import taxes, to reduce the high costs of transportation to market, to gain access to raw materials or a means of gaining market entry. Firms may either invest in or buy local companies or establish new operation facilities.
The selection of an entry mode and partners are critical decision because the nature of the firms operation in the country. Market is affected by and depends on the choice mode. It affects the future decisions because each mode entails an accompanying level of resource commitment and it is difficult to change from one entry mode to another without considerable loss of time and money.