I have spent the last two weeks working on an international expansion strategy for one of the products that I head at my workplace. Every multinational business has somewhere started as a local business and over time has adopted different modes of entry into the international business.
Similarly, the company that I currently work for is trying to break into the middle-east with something that we’re sure of whether it will work well in there or not. In order to develop a plan of action for how I am going to take this further, I started with a really basic research – What are the various modes of entry into the international business?
When businesses grow successfully within their domestic markets, they attempt to expand their businesses into international markets, in an attempt to replicate its success in overseas markets.
Your business can opt for different modes of entry into international business based on the size of your business, your expansion strategies, the potential size, the demand of your chosen international market, the economic and the business environment of the overseas nation etc.
In this article, I will share with you what are the different modes of entry into international business. Having an idea of the different modes of entry into international business will give you a head start in creating a solid international strategy for you business.
What are the Different Modes of Entry into International Business?
Some of the modes of entry into international business you can opt for include direct export, licensing, international agents and distributors, joint ventures, strategic alliance, and foreign direct investment.
I will put in my effort to explain to you what each of these entail for an offline product as well as for an online product based company. While the crux remains the same for both the types of businesses, how you carry out the strategy could have slight differences.
Let’s understand in detail what each of these modes of entry entail.
1. Direct Exporting
Direct exporting involves you directly exporting your goods and products to another overseas market. For some businesses, it is the fastest mode of entry into the international business.
Direct exporting, in this case, could also be understood as Direct Sales. This means you as a product owner in India go out, to say, the middle east with your own sales force to reach out to the customers.
In case you foresee a potential demand for your goods and products in an overseas market, you can opt to supply your goods to an importer instead of establishing your own retail presence in the overseas market.
Then you can market your brand and products directly or indirectly through your sales representatives or importing distributors.
And if you are in an online product based company, there is no importer in your value chain.
Advantages of Direct Exporting
Disadvantages of Direct Exporting
2. Licensing and Franchising
Companies which want to establish a retail presence in an overseas market with minimal risk, the licensing and franchising strategy allows another person or business assume the risk on behalf of the company.
In Licensing agreement and franchise, an overseas-based business will pay you a royalty or commission to use your brand name, manufacturing process, products, trademarks and other intellectual properties.
While the licensee or the franchisee assumes the risks and bears all losses, it shares a proportion of their revenues and profits you.
When does this work the best?
I explored this strategy in the case where one of the established companies of the other country already had a loyal audience with them.
At the same time, their product line had gaps which I was able to fill up. Therefore, just like two pieces of jigsaw, it made complete sense for them to carry my product.
How is this different from a Joint Venture, you would think? It is.
And in this case, I shall explain the little difference in the subsequent part of the article.
Advantages of Licensing and Franchising
Disadvantages of Licensing and Franchising
3. Joint Ventures
A joint venture is one of the preferred modes of entry into international business for businesses who do not mind sharing their brand, knowledge, and expertise.
Companies wishing to expand into overseas markets can form joint ventures with local businesses in the overseas location, wherein both joint venture partners share the rewards and risks associated with the business.
Both business entities share the investment, costs, profits and losses at the predetermined proportion.
This mode of entry into international business is suitable in countries wherein the governments do not allow one hundred per cent foreign ownership in certain industries.
For instance, foreign companies cannot have a 100 hundred per cent stake in broadcast content services, print media, multi-brand retailing, insurance, power exchange sectors and require to opt for a joint-venture route to enter the Indian market.
Here is what’s the difference between a Licensing/Franchisee kind of a setup and a Joint Venture.
The subtle nuance that I came across while recently creating a strategy was that a franchise setup would work well when you as a franchiser are a bigger brand in that particular product.
You could be big in your own country and not necessarily in the franchisee’s country.
In case of a Joint Venture, both the brands have a similar level of brand strength for that particular product. And therefore, they wish to explore that product in that international market together.
Advantages of Joint Venture
Disadvantages of Joint Venture
4. Strategic Acquisitions
Strategic acquisition implies that your company acquires a controlling interest in an existing company in the overseas market.
This acquired company can be directly or indirectly involved in offering similar products or services in the overseas market.
You can retain the existing management of the newly acquired company to benefit from their expertise, knowledge and experience while having your team members positioned in the board of the company as well.
Advantages of Strategic Acquisitions
Disadvantages of Strategic Acquisitions
5. Foreign Direct Investment
Foreign Direct Investment involves a company entering an overseas market by making a substantial investment in the country. Some of the modes of entry into international business using the foreign direct investment strategy includes mergers and acquisitions, joint ventures and greenfield investments.
This strategy is viable when the demand or the size of the market, or the growth potential of the market in the substantially large to justify the investment.
Some of the reasons because of which companies opt for foreign direct investment strategy as the mode of entry into international business can include:
Restriction or import limits on certain goods and products.
Manufacturing locally can avoid import duties.
Companies can take advantage of low-cost labour, cheaper material.
Advantages of Foreign Direct Investment
Disadvantages of Foreign Direct Investment
While every business dreams of global domination within its industry, you need to plan its internationalization strategy based upon your finances, existing capabilities, the growth potential of the overseas market etc. before opting for different modes of entry into the international business.
In this article I discussed with you the 5 modes of entry into the international business which I discovered during my research of how to expand the business that I work for internationally.
On another note, I am soon coming out with a book on various interesting things that you should do in your internships. Comment below or e-mail me to let me know the things you want me to add in it.
I will be glad to hear from you.