Exporting

Exporting is a typically the easiest way to enter an international market, and therefore most firms begin their international expansion using this model of entry. Exporting is the sale of products and services in foreign countries that are sourced from the home country. The advantage of this mode of entry is that firms avoid the expense of establishing operations in the new country. Firms must, however, have a way to distribute and market their products in the new country, which they typically do through contractual agreements with a local company or distributor. When exporting, the firm must give thought to labelling, packaging, and pricing the offering appropriately for the market. In terms of marketing and promotion, the firm will need to let potential buyers know of its offerings, be it through advertising, trade shows, or a local sales force.

Firms export mostly to countries that are close to their facilities because of the lower transportation costs and the often-greater similarity between geographic neighbours. For example, Mexico accounts for 40 percent of the goods exported from Texas (Cassey, 2010). Because the cost of exporting is lower than that of the other entry modes, entrepreneurs and small businesses are most likely to use exporting as a way to get their products into markets around the globe.

Forms of exporting

Forms of exporting include: indirect exporting, direct exporting and intra-corporate transfers.

1.Indirect exporting

      Indirect exporting is exporting the products either in their original form or in the modified form to a foreign country through another domestic company. Various publishers in India including Himalaya Publishing House sell  their products, i.e., books to various exporters in India, which in turn export these books to various foreign countries.

2.Direct Exporting

     Direct exporting is selling the products in a foreign country directly through its distribution arrangements or through a host country’s company.

3.Intra-corporate Transfers

    Intra-corporate transfers are selling of products by a company to its affiliated company in host country (another country). Selling of products by Hindustan Lever in India to Unilever in the USA. This transaction is treated as exports in India and imports in the USA.

  Licensing

In this mode of entry, the domestic manufacturer leases the right to use its intellectual property, i.e., technology, work methods, patents, copy rights, brand names, trademarks etc. to a manufacturer in a foreign country for a fee. Here the manufacturer in the domestic country is called ‘licensor’ and the manufacturer in the foreign country is called ‘licensee’.

Licensing is a popular method of entering foreign markets. The cost of entering foreign markets through this mode is less costly. The domestic company need not invest any capital as it has already developed intellectual property. As such, the domestic company earn revenue without additional investment. Hence, most of the companies prefer this mode of foreign entry.

Franchising

Another mode of entering foreign markets is international franchising. It is a form of licensing. The franchisor can exercise more control over the franchised compared to that in licensing. International franchising is growing at a very fast rate. Under franchising, an independent organisation called the franchisee operates the business under the name of another company called the franchisor. The franchisor provides the following services to the franchisee:

• Trade marks
• Operating systems
• Product reputations

Continuous support systems like advertising, employee training, reservation services, quality assurance programmes etc.

Special Modes

Some companies cannot make long-term investments or long-term contracts to enter foreign markets. Therefore, they may use specialised strategies.

These specialised strategies include:

• Contract manufacturing
• Management contract
• Turnkey projects

Contract Manufacturing

Some companies outsource their part of or entire production and concentrate on marketing operations. This practice is called the contract manufacturing or outsourcing.

Contract manufacturing provides locational advantages to the international company generated by the host country’s production. However, host country’s companies may not strictly adhere to the production design, quality standards, etc. These factors result in quality problems, design problem and other surprises.

Management Contracts

A management contract is an agreement between two companies, whereby one company provides managerial assistance, technical expertise and specialised services to the second company of the agreement for a certain agreed period for monetary compensation. Monetary compensation may be in the form of:

• A flat fee or
• Percentage over sales and
• Performance bonus based on profitability, sales growth, production or quality measures

Management contracts are mostly due to governmental interventions.

Turnkey Project

A turnkey project is a contract under which a firm agrees to fully design, construct and equip a manufacturing/business/service facility and turn the project over to the purchaser when it is ready for operation for a remuneration. The form of remuneration includes:

• A fixed price (firm plans to implement the project below this price)
• Payment on cost plus basis (i.e., total cost incurred plus profit).

This form of pricing allows the company to shift the risk of inflation/enhanced costs to the purchaser.

International turnkey projects include nuclear power plants, air ports, oil refinery, national highways, railway lines etc. Hence, they are large and multiyear projects.

Foreign direct Investment Without Alliances

Foreign direct investment (FDI) refers to an ownership stake in a foreign company or project made by an investor, company, or government from another country. FDI is generally used to describe a business decision to acquire a substantial stake in a foreign business or to buy it outright to expand operations to a new region. The term usually is not used to describe just a stock investment in a foreign company. FDI is a key element in international economic integration because it creates stable and long-lasting links between economies.

The mode of FDI without alliances is Greenfield strategy.

The Greenfield Strategy 

The term greenfield refers to starting with a virgin green site and then building on it. Thus, greenfield strategy is starting of the operations of a company from scratch in a foreign market. The company conducts the market survey, selects the location, buys or leases land, creates the new facilities, erects the machinery, remits or transfers the human resources and starts the operations and marketing activities.

Foreign Direct Investment with Strategic Alliances

Innovations, creations, productivity, growth, expansions and diversifications, in recent years, are mostly accomplished by the strategic alliances adopted by various companies like mergers, acquisitions and joint-ventures.

Mergers and Acquisitions

Domestic companies enter international business through mergers and acquisitions. A domestic company selects a foreign company and merges itself with the foreign company in order to enter international business.

Alternatively, the domestic company may purchase the foreign company and acquires its ownership and control.

Domestic business selects this mode of entering international business as it provides immediate access to international manufacturing facilities and marketing network. Otherwise, the domestic company faces serious problems in gaining access to international markets.

Joint Ventures

Two or more firms join together to create a new business entity that is legally separate and distinct from its parents. Joint ventures are established as corporations and owned by the funding partners in the predetermined proportions. Joint ventures are common in international business. Various environmental factors like social, technological, economic and political encourage the formation of joint ventures. Joint ventures provide the required strengths in terms of required capital, latest technology, required human talent etc. and enable the companies to share the risks in the foreign markets.

Real-Life Brand Examples for Each Mode of Entry

To better grasp how firms apply various modes of entry into international business, let’s look at prominent global brand case studies. Expanding into international markets requires strategic planning and the right entry mode. This guide explores various modes of entry into international business, their types, strategies, and real-world examples.

Conclusion

So, above are the methods of entry into foreign markets. Before entering the global market, the company must make a critical decision regarding its operational business plan. The best international business model should be selected based on the company’s expansion and diversification requirements. The company’s ability and willingness to devote resources, the desired level of control, the level of risk the company is willing to accept, the level of competition, the calibre of the infrastructure, and other factors must all be considered.