In international trade, foreign market entry modes are the ways in which a company can expand its services into a non-domestic market.
There are two major types of market entry modes: equity and non-equity. The non-equity modes category includes export and contractual agreements.Peng, W. Mike., (2018) Global Business. Cengage Learning, The equity modes category includes joint ventures and wholly owned subsidiaries.P, W. Mike., (2008) Global Business Cengage Learning, Different entry modes differ in three crucial aspects:
The degree of risk they present. The control and commitment of resources they require. The return on investment they promise.McDonald, F.; Burton, F.; Dowling, P. (2002), International Business, Cengage Learning EMEA,
Exporting Exporting is the process of selling of goods and services produced in one country to other countries.Yadong, L. (1999), Entry and Cooperative Strategies in International Business Expansion Age, Greenwood Publishing Group,
There are two types of exporting: direct and indirect.
Direct Exports
Passive exports represent the treating and filling overseas orders like domestic orders.
Types
Sales representatives Sales representatives represent foreign suppliers/manufacturers in their local markets for an established commission on sales. Provide support services to a manufacturer regarding local advertising, local sales presentations, customs clearance formalities, legal requirements. Manufacturers of highly technical services or products such as production machinery, benefit the most from sales representation.
Importing distributors Importing distributors purchase product in their own right and resell it in their local markets to wholesalers, retailers, or both. Importing distributors are a good market entry strategy for products that are carried in inventory, such as toys, appliances, prepared food.Reynolds, F. (2003), Managing Exports: navigating the complex rules, controls, barriers, and laws. Age, John Wiley & Sons, Inc.,
Advantages
Control over a selection of foreign markets and choice of foreign representative companies Good information feedback from target market, developing better relationships with the buyers Better protection of trademarks, patents, goodwill, and other intangible property Potentially greater sales, and therefore greater profit, than with indirect exporting.Yoshino, M. Y.; Rang an, U. S. (1995), Strategic alliances: an entrepreneurial approach to globalization, Harvard Business Press
Disadvantages
Higher start-up costs and higher risks as opposed to indirect exporting Requires higher investments of time, resources and personnel and also organizational changes Greater information requirements Longer time-to-market as opposed to indirect exporting.Foley, J. (1999), The Global Entrepreneur: taking your business international Age, Dearborn.
Indirect exports
Indirect export is the process of exporting through domestically based export intermediaries. The exporter has no control over its products in the foreign market.
Types
Export trading companies (ETCs) These provide support services of the entire export process for one or more suppliers. Attractive to suppliers that are not familiar with exporting as ETCs usually perform all the necessary work: locate overseas trading partners, present the product, quote on specific enquiries, etc.
Export management companies (EMCs) These are similar to ETCs in the way that they usually export for producers. Unlike ETCs, they rarely take on export credit risks and carry one type of product, not representing competing ones. Usually, EMCs trade on behalf of their suppliers as their export departments.Foley, J. (1999), The Global Entrepreneur: taking your business international Age, Dearborn,
Export merchants Export merchants are wholesale companies that buy unpackaged products from suppliers/manufacturers for resale overseas under their own brand names. The advantage of export merchants is promotion. One of the disadvantages for using export merchants result in presence of identical products under different brand names and pricing on the market, meaning that export merchant's activities may hinder manufacturer's exporting efforts.
Confirming houses These are intermediate sellers that work for foreign buyers. They receive the product requirements from their clients, negotiate purchases, make delivery, and pay the suppliers/manufacturers. An opportunity here arises in the fact that if the client likes the product it may become a trade representative. A potential disadvantage includes supplier's unawareness and lack of control over what a confirming house does with their product.
Nonconforming purchasing agents These are similar to confirming houses with the exception that they do not pay the suppliers directly – payments take place between a supplier/manufacturer and a foreign buyer.Salomon, Robert (2006), Learning from Exporting: New Insights, New Perspectives, Edward Elgar Publishing Limited
Advantages
Fast market access Concentration of resources towards production Little or no financial commitment as the clients' exports usually covers most expenses associated with international sales. Low risk exists for companies who consider their domestic market to be more important and for companies that are still developing their R&D, marketing, and sales strategies. Export management is outsourced, alleviating pressure from management team No direct handle of export processes.Peng, Mike W. (2009), Global Business, Mason: South-Western College Pub
Disadvantages
Little or no control over distribution, sales, marketing, etc. as opposed to direct exporting Wrong choice of distributor, and by effect, market, may lead to inadequate market feedback affecting the international success of the company Potentially lower sales as compared to direct exporting (although low volume can be a key aspect of successfully exporting directly). Export partners that incorrectly select a specific distributor/market may hinder a firm's functional ability.Evans, Rachael (2005), Report on a turnkey project for Apple's iPod in Nigeria, Maryland: University of Maryland University College
Companies that seriously consider international markets as a crucial part of their success would likely consider direct exporting as the market entry tool. Indirect exporting is preferred by companies who would want to avoid financial risk as a threat to their other goals.
Licensing An international licensing agreement allows foreign firms, either exclusively or non-exclusively to manufacture a proprietor's product for a fixed term in a specific market.
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.
As in this mode of entry the transference of knowledge between the parental company and the licensee is strongly present, the decision of making an international license agreement depend on the respect the host government show for intellectual property and on the ability of the licensor to choose the right partners and avoid them to compete in each other market. Licensing is a relatively flexible work agreement that can be customized to fit the needs and interests of both, licensor and licensee.
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 Retain established markets closed by trade restrictions Political risk is minimized as the licensee is usually 100% locally owned 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 The foreign partner can also become a competitor by selling its production in places where the parental company is already in.
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 (franchiser) 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 is one form of Licensing. Zimmerer, T. W.; Scarborough, N. M. (2008), Essentials of Entrepreneurship and Small Business Management, New Jersey: Pearson Prentice Hall,
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. In addition to that, while a licensing agreement involves things such as intellectual property, trade secrets and others while in franchising it is limited to trademarks and operating know-how of the business.Hoy, F.; Stanworth, J. (2003), Franchising: an international perspective, Routledge
Advantages of the international franchising mode: Low political 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:Cavusgil, T.; Knight, G.;Riesenberger, J. (2008), International Business - Strategy, Management and the New Realities, Pearson 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
Turnkey projects
A turnkey project refers to a project when clients pay contractors to design and construct new facilities and train personnel. A turnkey project is a way for a foreign company to export its process and technology to other countries by building a plant in that country. Industrial companies that specialize in complex production technologies normally use turnkey projects as an entry strategy.Peng, Mike W. (2009), Global Business, Mason: South-Western College Pub
One of the major advantages of turnkey projects is the possibility for a company to establish a plant and earn profits in a foreign country especially in which foreign direct investment opportunities are limited and lack of expertise in a specific area exists.