Text 1. The ways to enter a foreign market The simplest way to enter a foreign market is through exporting. The company may passively export its surpluses, or it may make a commitment to expand exports to a particular market. In either case the company produces all its goods in the home country though it may make changes to them for the export market. There are two types of exporting: indirect and direct. Indirect exporting means working through independent middlemen such as agents and dealers. Indirect exporting can be done with little investment and therefore involves less risk. Mistakes can be made but they should not be too costly.
Direct exporting involves setting up an export department or even an overseas branch which actively uses the company’s own employees. This will give the seller more presence and control in the market but obviously means heavier investment.
A second method of entering a foreign market is through joint ventures with foreign companies. There are three types of joint venture:
Licensing is the simplest way for a manufacturer to produce its goods in the foreign market. The company enters into an agreement with a licensee offering the right to use a manufacturing process, trademark, patent or other item of value for a fee or royalty. Once again the company gains entry into the market at little risk but there are potential disadvantages. The company has less control over the licensee than if it had set up its own production facilities. If the licensee is very successful, the company has given up the potential for large profits and, if and when the contract ends, it may find it has created a competitor.
Another option is contract manufacturing. This means contracting with foreign manufacturers to produce the product. It has the drawback of less control over the manufacturing process and the loss of potential profits on manufacturing. On the other hand, it offers the company the chance to get off to a quicker start and take on less risk. There is also the opportunity to form a partnership or buy out the local manufacturer later.
Joint ownership ventures consist of the company joining with foreign investors to create a local business in which they share joint ownership and control. Joint ownership may make sense for political or economic reasons. Sometimes foreign governments make joint ownership a condition for entry. It also has certain drawbacks. Above all, there is the danger of disagreement over crucial issues such as investment and marketing. One firm may want to put money back into the company while the other wants to take it out.
Besides exporting and joint ventures, there is also the possibility of direct investment – in other words developing foreign-based assembly or manufacturing facilities. If the foreign market is large enough, local production facilities offer many advantages. The company may have lower costs in the form of cheaper labor, raw materials and transport/distribution. The company will gain a better image in the host country because it creates jobs. It also develops a deeper relationship with government, customers, suppliers and distributors. Finally, by direct investment, the company keeps full control over investment and marketing policies. The main disadvantage is that the firm faces many risks such as devalued currencies, declining markets or even government takeover.
(J. Comfort & N. Brieger, Longman, p.103-105)
