Entry Methods in International Business
Many corporations are extending their operations internationally. Abroad, specific methods are employed to access the global market when such organizations desire to conduct business there. An organization can enter the new global market through one of these entrance points. Foreign direct investment, licensing, exporting, franchising, and other unique entry methods are among the various entry methods. The two entrance modes—exporting and licensing—will be the main topics of this essay (Hill, 2008).
Exporting
Selling goods that have been prepared and stored in the home nation of the supplying company for export. This method favors companies with limited sales potential in the target country because there will be little product adaptation required. It is also favorable in conditions where production cost in the destination country might be too high, and there are liberal import policies. Countries with high political risk discourage the establishment of foreign companies; thus, exporting is the ideal method to enter such markets. Therefore, exporting is a well-established model to penetrate the external market since it does not require that the goods are produced in the target country and thus no investment in foreign production resources. Johnson and Johnson, one of the largest international pharmaceutical companies, use exports to enter into new markets and is currently selling its products all over the world (Hill, 2008).
There are different categories of exporting; direct exporting and indirect exporting. Direct exporting is a straightforward strategy where the organization deals with its customers on its own and is responsible for marketing its products. This gives the company better control of its brands abroad and is convenient in increasing sales. On the other hand, indirect exporting involves hiring a different company in the home country to handle the exports. In this case, the organization is relieved from dealing with the foreign consumers and markets.
However, exporting has its advantages and disadvantages. The advantages include relatively low financial exposure; the enterprise is relieved from expenditures of building new production units in the foreign country. If the company selects an agency overseas to handle the export, it can enter the global market with minimal financial resources. Secondly, exporting permits gradual market entry; the company can quickly introduce new products after the previous goods have been established in the foreign market. Thirdly, this mode allows the organization to acquire knowledge about the local market, especially in direct exporting. Lastly, exporting helps the companies avoid restrictions on foreign investment.
Equally important are the disadvantages of the method, such as potential conflicts with the distributors. Since everyone is in business, there are often a series of disputes, especially when it comes to pricing in the foreign market. Another disadvantage is complexity in logistics; companies that deal with bulk goods may face difficulties because they are limited by the mode of transportation and handling costs. However, organizations that engage in indirect exportation don't meet these challenges directly. Finally, companies that use export to enter the market are vulnerable to tariffs, especially import duties imposed by foreign countries.
Licensing
In this mode of market entry, a manufacturer rents out the right to use its technology, copyright, patent, or brand name to a company in the foreign country for compensation. The manufacturer in the countries of origin is called the licensor, whereas the one in the foreign country is referred to as the licensee. The cost of entering the global market through this method is cheaper than exporting. The licensor can choose any international location and enjoy the market without any responsibilities of investment, ownership, and managerial. The process of the licensing agreement involves specifying the boundaries, determining compensation, establishing privileges and constraints, and specifying the period of the contract. For example, PepsiCo had a deal with a Coke bottling plant to package and distribute cola beverages having the Pepsi-Cola trademark (Young et.al 1989).
This mode also has its advantages; they include:
- Low financial risks; the company in the home country does very little regarding sales and marketing in the foreign country. Therefore, there are minimal costs incurred. Furthermore, the domestic company earns compensation from the licensee.
- Low investment cost on the part of the licensor; the licensor sells its brands abroad without spending on infrastructure or employee management.
- The licensee gets the benefits with minimum investment in product research and development.
- The licensee eludes himself from the risk of product failure; this is the sole responsibility of the licensor.
In the same manner, there are disadvantages to this mode of entry. First, it reduces the market opportunities for both parties involved because the agreement limits the boundaries of operation. Secondly, there are chances of disagreement between the two companies; this may arise from the breach of contract by either party. Thirdly, one company might affect the other in case of improper activities since both sides are involved in the maintenance of product quality and product promotion (Root, 1994).
Conclusion
In conclusion, companies that are focused on the international market must do analysis on political, economic, cultural, and financial factors to ascertain whether a country is right to expand operations of the company. This will also help figure out the most appropriate mode of entry to use to increase profitability and create value in the new market.
Reference
Root, F. R. (1994). Entry strategies for international markets. Jossey-Bass.
Hill, C. (2008). International business: Competing in the global market place. Strategic Direction, 24(9).
Young, S., Hamill, J., Wheeler, C., & Davies, J. R. (1989). International market entry and development: strategies and management. Harvester Wheatsheaf.
