QUESTION:

Explain various modes of entry into foreign markets

giving merits and demerits of each mode.
 Introduction.
 Foreign markets are any markets outside of a company's own country.

 Selling in foreign markets involves dealing with different languages, cultures, laws,
rules, regulations and requirements.
 Companies looking to enter a new market need to carefully research the potential
opportunity and create a market entry strategy.
 E.g.

 What is the best way to enter a new market?

 Should a company first establish an export base or license its products to gain experience in a
newly targeted country or region? Or

 does the potential associated with first-mover status justify a bolder move such as entering an
alliance, making an acquisition, or even starting a new subsidiary? , etc
Reasons why companies expand into foreign markets
 Explore markets with better profitability and to increase revenue potential
 Domestic market constraints:
 Achieve economies of scale with a larger customer base.
 Reduce over dependency on any one market
 Gain competitive advantage.
 Expansion allows the companies to diversify
 Greater access to talent,
 Improve company’s reputation
 Cost savings
Companies seeking to enter a foreign market need to do the
following:
 Research the foreign market thoroughly and learn about the country and
its culture.

 Understand the unique business and regulatory relationships that impact

their industry.

 Use the Internet to identify and communicate with appropriate foreign

trade corporations in the country or with their own government’s embassy
in that country.
 Types of Foreign Market
 Exporting.
Entry Modes
 Licensing and Franchising.
 Partnering and Strategic Alliance.
 Acquisition.
 Joint venture.
 online sales
 Foreign direct investment.
 Wholly owned subsidiary.
 Piggybacking.
 Contract Manufacturing And Outsourcing.
 Greenfield Venture (Launch of a new, wholly owned subsidiary)
 Exporting:
It is a cross border sale of domestically grown or produced goods.

Merits of exporting Demerits of exporting

 Better knowledge of the market;  Less response to customer communications

 Fair returns on exports; as quickly as a local agent.
 Helpful in testing the company products  Barriers to exporting in the form of transport
 Protection of patents, goodwill, costs and tariffs.
trademarks  High-cost strategy
 Shorter distribution chain;  Time consuming
 More control over marketing mix  Involves a lot of formalities
 Effective after sale service  Little control over market price
 Less export experience required,  Reduced profit due to increased price
 Etc.  High competition
 Etc.
 Licensing and Franchising
 Franchising is a partnership in which one
Merits.
party allows another to borrow its  Fast entry,
business model or brand name. This is  low cost,
usually done at a fee. The party which  low risk
lends its name or business model is called  Decreases the exposure to economic and
the franchisor, while the party paying for political instabilities in the foreign country
the permissions is the franchisee.

 Licensing is also a legal partnership Demerits.

 Less control,
between two parties. In this type of  Leakage of trade secrets
arrangement, one party (the licenser) sells  licensee may become a competitor,
the rights for the use of its intellectual  legal and regulatory environment (IP and
property to the licensee. The licensee can contract law) must be sound.
then manufacture the products of the  Selecting one wrong franchisee can ruin the
licensor, while paying royalties to the reputation of the whole franchise
licensor.
 Contract Manufacturing And Outsourcing:
Contract manufacturing is the production of goods by a third-party company (the contract
manufacturer) for a company that cannot produce the goods in house.
Ultimately, contract manufacturing is a form of outsourcing that helps businesses manufacture their
products and goods.
Merits Demerits

 Lower Overhead & Maximize Profits.  Difficulty in maintaining quality standards

 Access to people with specific skill sets/  Intellectual Property Risks
Technical Expertise  Higher Long-Term Costs
 Development of medium and small-scale  Being dependent on the contract manufacturer’s
industries schedule
 More sets of eyes on your product to catch  Local manufacturers in foreign markets may lose
mistakes business.
 Ability to focus on your company’s core  The possibility of your product being poached or
competencies sold to competitors
 No dilution of control  Communication barriers due to language and
 Scalability Opportunities cultural differences.
 Example of Contract Manufacturing and Outsourcing
Because of high domestic labor costs, many U.S. companies manufacture their products in
countries where labor costs are lower.
The attraction is not only a large pool of knowledge workers but also significantly lower
wages.
U.S. Wage per Hour Indian Wage per
Occupation
(per year) Hour (per year)
$29.40 per hour $6.30 per hour ($13,000
Middle-level manager
($60,000 per year) per year)

Information technology $35.10 per hour $7.50 per hour ($15,000

specialist ($72,000 per year) per year)

$13.00 per hour $2.20 per hour ($5,000

Manual worker
($27,000 per year) per year)
Source: Data obtained from “Huge Wage Gaps for the Same Work Between Countries – June 2011,” WageIndicator.com
 Partnerships And Strategic Alliances
A strategic alliance is an arrangement between two companies to undertake a mutually
beneficial project while each retains its independence. The agreement is less complex and
less binding than a joint venture, in which two businesses pool resources to create a
separate business entity.

Merits Demerits

 local knowledge of a foreign market  Higher cost than exporting, licensing, or

 competitive advantage through access to a franchising;
partner’s resources  integration problems between two corporate
 Shared costs & Risks cultures,
 reduce investment needed,  problems with deciding who invests what & how to
 Opportunities for growth split profits.
 reduced risk, seen as local entity  •Strategic priorities change over time
 Etc.  Clash of corporate cultures or the perceived
diminution of independence
 Etc.
Example: Apple Pay and Master Card , Nokia and Microsoft's joint partnership agreement to build Windows
 Joint Venture
A joint venture consists of two companies establishing a jointly-owned business. One of the
owners will be a local business (local to the foreign market). The two companies would
then provide the new business with a management team and share control of the joint
venture.
Merits of JVs Demerits of JVs
 Faster access to foreign markets  Higher cost than exporting, licensing, or franchising;
 Enables flexibility  complicated legal process,
 Enables transfer of technology  profits derived from an IJV are diluted because they
 reduced risk, seen as local entity are shared
 Reputation of the resident partner gives the joint  An international joint venture can result in a
venture credibility in the local marketplace, frustrating experience and ultimately a failure if it
 The resident partner also often has existing lacks adequate planning and strategy.
 regulatory uncertainties and economic downturns can
relationships with key suppliers and customers,
be difficult to anticipate and can have a debilitating
and proficiency in the local language and
impact on JVs.
customs
 Wholly Owned Subsidiaries
A wholly owned subsidiaries is the process where by an organisation enters a foreign
market with 100% ownership of the foreign entity.
Demerits
Merits
 High cost.
 Gaining of local market knowledge is easy  High risk due to unknowns
 It can be seen as insider who employs locals  Slow entry due to setup time
 Maximum control,  Higher risk exposure namely political risk
 A wholly owned subsidiary maybe required if a firm is and economic risk.
trying to realize location and experience curve economies.  Heavier pre-decision information
 Local production lessens transport/import-related costs, gathering & research evaluation.
taxes & fees.  “Country-of-origin” effects can be lost by
 Availability of goods can be guaranteed, delays may be manufacturing elsewhere.
eliminated.  Establishing a wholly owned subsidiary is
 More uniform quality of product or service. generally the most costly method of
 Etc. serving a foreign market..
 Foreign Direct Investment (FDI)
It is a mode of entering foreign markets through investment. Investment may be directly or
indirectly through financial institutions. FDI influences the investment pattern of the
economy and helps to increase overall development. The extent to which FDI is allowed in
a country is subjected to the government regulations of that country.
Demerits
 An effective way to acquire important natural
Demerits
resources
 Access to markets  Exposure to high levels of
 It is an easy mode of entry. political risk
 control over the operations and other aspects of  The government policies may not
the business be helpful
 Leverage low-cost labour, cheaper material
 The return on investment may be
 FDI helps to boost the economy of a country
 Etc low
when deciding which mode of entry to choose,
companies should ask themselves two key questions;

1. How much of our resources are we willing to

commit?

2. How much control do we wish to retain?

Important factors to consider for foreign markets

External factors Internal factors

 Market size  Company objectives
 Market Growth  Need for control
 Government regulations  Internal Resources, Assets and
 Level of competition Capabilities
 Physical infrastructure  Flexibility
 Level of risk  Level of commitment
 Production and shipping costs
 Pricing.
For more detailed information refer to word document