There are a variety of ways in which a company can enter a foreign market. No one market entry strategy works for all international markets. Direct exporting may be the most appropriate strategy in one market, while in another you may need to set up a joint venture, and in yet another you may decide to license your manufacturing. There will be a number of factors that will influence your choice of strategy, including, but not limited to, tariff rates, the degree of adaptation of your product required, marketing and transportation costs. While these factors may well increase your costs, it is expected the increase in sales will offset these costs. The following strategies are the main entry options open to you.
Direct exporting is selling directly into the market you have chosen using in the first instance you own resources. Many companies, once they have established a sales program, turn to agents and/or distributors to represent them further in that market. Agents and distributors work closely with you in representing your interests. They become the face of your company and thus it is important that your choice of agents and distributors is handled in much the same way you would hire a key staff person.
Licensing is a relatively sophisticated arrangement where a firm transfers the rights to the use of a product or service to another firm. It is a particularly useful strategy if the purchaser of the license has a relatively large market share in the market you want to enter. Licenses can be for marketing or production.
Franchising is typically a North American process for rapid market expansion, but it is gaining traction in other parts of the world. Franchising works well for firms that have a repeatable business model (e.g. food outlets) that can be easily transferred into other markets. There are two caveats when considering using the franchise model. The first is that your business model should either be very unique or have strong brand recognition that can be utilized internationally. The second is that you may be creating your future competition in your franchisee.
Partnering is almost a necessity when entering foreign markets and in some parts of the world (e.g. Asia) it may be required. 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.
Joint ventures are particular forms of partnerships that involve 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, either geographic or product, and create a third company to undertake this. Risks and profits are normally shared equally.
Buying a Company
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, are 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, 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.
Piggybacking is a particularly unique way of entering the international arena. If you have a particularly interesting and unique product or service that you sell to large domestic firms that are currently involved in foreign markets, you may want to approach them to see if your product or service can be included in their inventory for international markets. This reduces your risk and costs because you are essentially selling domestically and the larger firm is marketing your product or service for you internationally.
Turnkey projects are particular to companies that provide services such as environmental consulting, architecture, construction and engineering. A turnkey project is where the facility is built from the ground up and turned over to the client ready to go – turn the key and the plant is operational. This is a very good way to enter foreign markets as the client is normally a government and often the project is being financed by an international financial agency such as the World Bank, so the risk of not being paid is eliminated.
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 is one of the riskiest and most costly options, but some markets may require you to undertake the cost and risk due to government regulations, transportation costs, and the ability to access technology or skilled labour.